Ill 


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111 

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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

RIVERSIDE 

GIFT  OF 

Dr.  Gordon  Vatkins 


.■> 


INTRODUCTION  TO 
ECONOMICS 


BY 


JOHN  ROSCOE  TURNER,  Ph.D. 

PROFESSOR   OF   ECONOMICS  AND   DEAN   OF    WASHINGTON    SQUARE   COLLEGE 
NEW   YORK   UNIVERSITY 


CHARLES   SCRIBNER'S   SONS 

NEW   YORK  CHICAGO  BOSTON 


h® 


Copyright,  1919,  bt 
CHARLES  SCRIBNER'S  SONS 


Printed  in  the  United  States  of  America. 
E 


PREFACE 

This  book  is  an  outgrowth  of  classroom  discussions.  It 
contains  in  substance  the  talks  on  economics  which  have 
been  made,  for  the  past  eleven  years,  to  my  classes  in 
Cornell  and  New  York  Universities. 

No  apology  is  offered  for  the  fact  that  this  volume  is 
limited  to  a  discussion  of  principles.  Even  the  concluding 
chapters  on  corporations  are  designed  to  exemplify  princi- 
ples. The  time  has  long  since  passed  when  a  single  volume 
can  treat  exhaustively  the  whole  field  of  economics.  I 
shall  be  more  than  content  if  this  work  justifies  the  scope 
indicated  for  it  in  the  title — Introduction  to  Economics. 

Designed  as  an  introduction,  this  book  will  serve  as  a 
means  to  the  end  of  a  more  intelligent  study  of  economic 
questions.  It  does  not  dispense  with  the  necessity  of  read- 
ing the  many  excellent  treatises  devoted  to  the  different 
phases  of  economics;  rather  it  distinctly  calls  for  such  read- 
ings. It  merely  prepares  the  mind  of  the  student  for  the 
thought  contained  in  the  more  advanced  and  specialized 
works  on  the  subject  and  the  practical  applications  they 
reveal. 

At  the  end  of  each  chapter  are  appended  exercises  in 
the  form  of  questions,  problems,  and  fallacies,  the  object 
being  to  stimulate  independent  thinking  as  well  as  to  de- 
velop the  power  of  applying  what  the  student  has  learned. 
In  so  far  as  may  be,  the  problems  are  stated  in  the  form  in 
which  they  appear  in  practical  affairs. 

The  effort  has  been  made  to  avoid  obscure  reasoning, 

iii 


iv  Preface 

loose  generalities,  and  controversial  entanglements.  There 
are  text-books  in  economics  which  set  forth  the  subject 
soundly  but  in  a  manner  too  obscure  to  be  well  adapted 
for  the  beginner.  The  author  of  a  book  for  beginners  must 
hold  the  needs  of  the  student  constantly  in  mind.  Some 
writers  apparently  are  so  obsessed  by  fear  of  the  critic  as 
quite  to  forget  the  needs  of  the  student.  Other  authors, 
though  they  write  fearlessly,  load  the  evidence  in  favor  of 
this  contention  or  that,  thus  failing  to  secure  the  balance 
and  proportion  becoming  to  a  science.  Still  others  skim 
the  principles  in  haste,  wishing  to  introduce  the  beginner 
forthwith  to  a  discussion  of  the  great  practical  problems. 
These  authors  are  unmindful  of  the  fact  that  without  a  sub- 
stantial grounding  in  fundamentals  the  student's  thought 
must  go  astray  when  attacking  the  great  social  problems, 
involving,  as  they  do,  burning  issues  replete  with  "isms." 
These  superficial  writings  are  productive  of  harm  and  de- 
serve to  be  frowned  upon.  There  was  never  a  greater  need 
for  sound  thinking  in  economics  than  in  these  unsettled 
times  following  the  war.  But  to  sound  thinking  there  is 
only  one  true  guide — the  knowledge  of  fundamentals.  How 
far  I  have  succeeded  in  the  attempt  to  serve  this  end  must 
be  left  for  others  to  decide. 

I  have  made  persistent  effort  to  keep  the  dynamic  dis- 
tinct in  thought  from  the  static  theory,  but  the  separation 
has  been  in  thought  rather  than  in  space-.  The  student 
must  proceed  with  both  in  mind  if  he  would  at  once  con- 
ceive principles  and  appreciate  their  practical  importance 
in  a  world  of  change  and  progress.  The  laws  of  economics, 
like  the  rules  of  arithmetic,  are  true,  but  you  undertake  the 
impossible  in  attempting  to  hold  the  student's  attention  to 
subject-matter  so  dry  apart  from  the  practical  aid  of  illus- 


Preface  v 

tration.  To  put  actual  changes  out  of  sight  is  to  deaden  the 
student's  interest  in  the  subject. 

I  have  avoided  the  introduction  of  terms  for  which  there 
is  not  sufficient  precedent;  have  followed  the  tendency  to 
abandon  the  artificial  classification  of  productive  factors 
into  land,  labor,  and  capital;  have  preferred  to  use  the 
term  desirability  rather  than  utility  in  the  value  problem. 
Too  much  juggling  with  the  term  utility  has  left  it  with 
no  distinct  meaning.  And,  moreover,  the  word  desirability 
(for  the  use  of  which  there  is  sufficient  precedent)  ex- 
cellently expresses  the  idea  of  the  fitness  or  quality  of  an 
object  to  excite  a  wish  to  possess.  The  word  utility  finds 
use  in  the  problem  of  social  production. 

I  have  been  anxious  to  avoid  the  novel,  but  this  has  not 
prevented  some  departures  here  and  there  from  the  cur- 
rent statements  of  theories. 

The  first  four  chapters  were  written  in  the  belief  that 
economic  institutions  can  be  adequately  comprehended 
only  in  the  light  of  their  historical  development.  The  stu- 
dent will  have  deeper  regard  for  the  institutions  under 
which  he  lives  when  he  contemplates  that  they  are  the  out- 
growth of  progressive  changes  through  many  centuries; 
he  will  have  only  contempt  for  the  constitution  meddlers 
who  would  remodel  our  economic  life  over  a  week's  end. 
He  will  know  that  these  institutions  form  no  barrier  to 
progress  when  they  are  subject  to  modification  as  needs 
require.  Following  the  study  of  essential  institutions,  the 
problems  of  value  and  price  are  presented.  The  remainder 
of  the  book  is  devoted  to  the  following  topics  in  the  order 
here  given:  Money  and  banking;  production  and  rent; 
labor  and  wages;  capital  and  interest;  corporations,  mo- 
nopoly, and  trust  legislation. 


vi  Preface 

I  wish  to  acknowledge  with  gratitude  the  valuable  sug- 
gestions received  during  the  preparation  of  this  book  from 
my  colleagues — Willard  Fisher,  Major  B.  Foster,  David 
Friday,  Charles  W.  Gerstenberg,  Joseph  French  Johnson, 
and,  particularly,  Arthur  L.  Faubel  who  has  read  the 
proof  searchingly,  constructively.  Acknowledgment  is  also 
made  to  my  friend  and  former  teacher,  Frank  A.  Fetter, 
of  Princeton,  for  his  careful  reading  and  criticism  of  three 
chapters.  No  formal  acknowledgment  is  sufficient  to  ex- 
press my  deep  obligation  to  Herbert  J.  Davenport,  of  Cor- 
nell, who  went  over  the  entire  first  draft  of  the  work  in  a 
rigorously  critical  and  constructive  manner. 

J.  R.  T. 

New  York  University, 
May  i,  1919. 


CONTENTS 


CHAPTER  I 


PAGE 


Introduction:  The  Beginning  of  Economic  Institu- 
tions            i 

i.  The  science  of  economics.  2.  Requirements  of  the  economist. 
3.  Mistakes  in  early  specialization.  4.  Principles  first,  then  speciali- 
zation. 5.  From  objective  to  subjective  control.  6.  Knowledge  is 
power.  7.  From  physical  to  mental.  8.  Three  stages  of  progress. 
9.  The  hunter  stage.  10.  The  pastoral  stage.  11.  Domestication 
and  indirect  production.  12.  Conflicting  interests.  13.  Pressure  and 
progress.  14.  Tribal  property.  15.  Variety  and  trade.  16.  Self- 
sufficiency.  17.  The  agricultural  stage.  18.  What  the  agriculturist 
must  know.  19.  Three  essentials  of  thrift.  20.  A  settled  life.  21. 
Production  and  civilization.  22.  Slavery.  23.  The  conclusion.  24. 
From  primitive  to  manorial  times.  25.  Feudalism.  26.  The  manorial 
system  in  England.  27.  Ashley's  picture  of  the  eleventh-century 
manor.  28.  Tenants.  29.  Self-sufficiency  on  manors.  30.  The  re- 
lation of  property  to  government.    31.  Exercises. 


CHAPTER  n 

English  Guilds  and  the  Decline  of  Local  Restric- 
tions         22 

1.  Man  a  user  of  tools.  2.  The  interdependence  of  industries  in  a 
civilized  state.  3.  The  old  and  new  in  England's  development.  4. 
Development  of  great  wealth.  5.  Isolation  and  local  unity.  6.  The 
alliance  against  lords  of  manors.  7.  Guilds.  8.  The  guild  as  an  eco- 
nomic institution.  9.  Merchant  guilds.  10.  In  France,  n.  The 
craft  guild.  12.  The  Hundred  Years'  War  between  England  and 
France.  13.  Changes  during  the  war:  In  religion;  in  language;  knight- 
hood; the  Black  Death;  the  Peasants'  Revolt  of  1381;  Enclosures. 
14.  Exercises. 

vii 


viii  Contents 


CHAPTER  III 


TACK 


Nation  u    CONTROL  AND   [HE   INDUSTRIAL  REVOLUTION    .      ^0 

i.  The  national  system,  i.  Monopolies.  3.  Mercantilism  or  Col 
bertism.  4-  Restrictions.  s«  National  ideals.  6.  The  domestic  sys 
tern.  ;-.  The  [ndustrial  Revolution.  S.  Commerce  and  need  (or 
machinery.  0.  rhe  beginning  of  industrial  classes.  10.  Scientific 
farming,  ex.  Control  of  natural  forces.  12.  rhe  long  delay.  13. 
Changed  point  of  view.  [4.  Social  changes.  15.  The  Physiocrats. 
16.  The  freedom  of  trade  and  agriculture.  17.  Political  effects.  18, 
Beginning  of  soda!  legislation.  10.  A  summary  of  changes  which 
affected  wage-earners.  :o.  The  formation  of  labor-unions.  21,  Ex- 
ercises. 

CHAPTER  IV 
The  Present  Economic  Order 54 

1.   Introduction.      I,    Economic  laws.      ;.    Theory.     4.    The  present 

economic  order.  >.  Private  property.  6.  Social  expediency.  7.  The 
revival  of  enclosures.  8.  Transportation.  9.  rhe  industrial  develop- 
ment of  this  country,  to.  The  growth  o\  cities.  11.  An  example 
from  statistics.  i.\  The  geographic  division  of  labor.  13,  The  divi- 
sion of  labor  and  mutual  dependence  in  the  factory  system.  14.  Dif- 
ferentiation. 15.  Trading.  10.  Competition.  17.  The  extent  of 
competition.  [8.  Self  interest.  10.  Economic  classes.  JO.  Contracts. 
21,    The  automatic  regulation  of  industry.     ::.   Kxercises. 

CHAPTER  V 

Tut.  Surjkct-Matter  of  ECONOMICS      75 

i.  The  subject  matter  of  economics,  2,  Productive  capacity  and 
current  supplies.  3,  Destruction  often  a  real  gain.  4.  The  dissemi- 
nation of  education.  5.  Social  wealth.  0.  Wealth  formerly  defined 
BS  capacity.  7.  Wealth  not  a  comparative  concept.  8.  Private 
wealth  ami  public  wealth.  9.  Per  capita  wealth  and  national  wealth. 
to.  Increasing  aggregate  wealth  and  diminishing  per  capita  wealth. 
ii.  View  points  in  autocratic  and  democratic  countries.  1  2.  Wealth 
and  property.      13.   Capital  and  wealth.      14,    The  money  expression 

of  wealth.  15.  Economics.  t6.  Economic  laws  and  social  institu- 
tions. 17.  The  goal  of  public  policy.  18.  Changes  in  economics. 
10.  Economics  and  political  reforms.  JO,  Economics  and  business. 
31,   Kxercises. 


Contents  ix 


CHAPTER  VI 

PAGE 

Desire,  Desirability      98 

1.  Desires  as  motives.  2.  Desires  are  recurring.  3.  Intelligence, 
desire,  effort.  4.  Desires  for  near  and  remote  possession.  5.  Stand- 
ards of  consumption.  C.  Harmony  in  consumption.  7.  Desires  and 
productive  capacity.  8.  "The  cost  of  high  living."  9.  Desires  and 
ultimate  wealth.  10.  Desires  and  association  of  ideas,  n.  Altruistic 
desires.  12.  Desires  and  wants.  13.  Necessities.  14.  Repressibility 
of  desires.  15.  The  standard  of  life.  16.  The  notion  of  scarcity. 
17.  Desirability.  18.  Utility.  19.  Diminishing  desirability.  20.  The 
equal  desirabilities  of  units.  21.  Total  desirability.  22.  Graphic  il- 
lustration of  equal  desirabilities.  23.  Graphic  illustration  of  desira- 
bilities at  different  times.  24.  Marginal  desirability.  25.  The  ten- 
dency to  equality  of  marginal  desirabilities.  26.  Graphic  illustration 
of  this  equality.  27.  Examples  of  marginal  desirability.  28.  Exer- 
cises. 

CHAPTER  VII 
Market  and  Price      123 

1.  What  is  a  market?  2.  Examples  of  a  market.  3.  Transporta- 
tion extends  the  market.  4.  Wheat  is  sold  in  a  broad  market.  5. 
Transporting  costs  taken  into  account.     6.  The  demand  at  Liverpool. 

7.  The  communication  of  information.     8.  Market  ratios  and  price. 

9.  The  market  price  at  equating-point  between  market  supply  and 
market  demand.  10.  The  problem  of  price,  n.  The  price  level. 
12.  Price-making.  13.  Gonditions  of  price-making:  (I)  One  seller 
without  a  marginal  limit.  (II)  One  seller  with  a  marginal  limit.  (Ill) 
A  number  of  sellers  with  marginal  limit.  (IV)  Two-sided  competition. 
14.  Exercises. 

CHAPTER  VIII 
Value  and  Demand 144 

1.  Price,  a  restatement.  2.  Value.  3.  Value  is  an  individualistic 
matter.  4.  "The  paradox  of  value."  5.  Surplus  and  the  limit  to 
exchanges.     6.  Decision    in    directing    expenditures.     7.  Valuation. 

8.  Caution  in  the  use  of  supply  and  demand.     9.  Amount,  supply. 

10.  Price-making  illustrated.  11.  Market  demand  and  market  sup- 
ply. 12.  Definitions  illustrated.  13.  Unrevealed  price  limits  of  buy- 
ers and  sellers.  14.  Elasticity  of  market  demand.  15.  Complemen- 
tary goods.  16.  Prospective  prices  and  present  demand.  17.  De- 
mand curve.  18.  Demand:  Questions  and  answers.  19.  Recapitula- 
tion.    20.  Exercises. 


viii  Contents 


CHAPTER  III 

PAGE 

National  Control  and  the  Industrial  Revolution   .     36 

1.  The  national  system.  2.  Monopolies.  3.  Mercantilism  or  Col- 
bertism.  4.  Restrictions.  5.  National  ideals.  6.  The  domestic  sys- 
tem. 7.  The  Industrial  Revolution.  8.  Commerce  and  need  for 
machinery.  9.  The  beginning  of  industrial  classes.  10.  Scientific 
farming,  n.  Control  of  natural  forces.  12.  The  long  delay.  13. 
Changed  point  of  view.  14.  Social  changes.  15.  The  Physiocrats. 
16.  The  freedom  of  trade  and  agriculture.  17.  Political  effects.  18. 
Beginning  of  social  legislation.  19.  A  summary  of  changes  which 
affected  wage-earners.  20.  The  formation  of  labor-unions.  21.  Ex- 
ercises. 

CHAPTER  IV 
The  Present  Economic  Order 54 

1.  Introduction.  2.  Economic  laws.  3.  Theory.  4.  The  present 
economic  order.  5.  Private  property.  6.  Social  expediency.  7.  The 
revival  of  enclosures.  8.  Transportation.  9.  The  industrial  develop- 
ment of  this  country.  10.  The  growth  of  cities,  n.  An  example 
from  statistics.  12.  The  geographic  division  of  labor.  13.  The  divi- 
sion of  labor  and  mutual  dependence  in  the  factory  system.  14.  Dif- 
ferentiation. 15.  Trading.  16.  Competition.  17.  The  extent  of 
competition.  18.  Self-interest.  19.  Economic  classes.  20.  Contracts. 
21.  The  automatic  regulation  of  industry.     22.  Exercises. 


CHAPTER  V 
The  Subject-Matter  of  Economics      75 

1.  The  subject-matter  of  economics.  2.  Productive  capacity  and 
current  supplies.  3.  Destruction  often  a  real  gain.  4.  The  dissemi- 
nation of  education.  5.  Social  wealth.  6.  Wealth  formerly  denned 
as  capacity.  7.  Wealth  not  a  comparative  concept.  8.  Private 
wealth  and  public  wealth.  9.  Per  capita  wealth  and  national  wealth. 
10.  Increasing  aggregate  wealth  and  diminishing  per  capita  wealth, 
n.  View-points  in  autocratic  and  democratic  countries.  12.  Wealth 
and  property.  13.  Capital  and  wealth.  14.  The  money  expression 
of  wealth.  15.  Economics.  16.  Economic  laws  and  social  institu- 
tions. 17.  The  goal  of  public  policy.  18.  Changes  in  economics. 
19.  Economics  and  political  reforms.  20.  Economics  and  business. 
21.  Exercises. 


Contents  ix 


CHAPTER  VI 

PAGE 

Desire,  Desirability      98 

1.  Desires  as  motives.  2.  Desires  are  recurring.  3.  Intelligence, 
desire,  effort.  4.  Desires  for  near  and  remote  possession.  5.  Stand- 
ards of  consumption.  6.  Harmony  in  consumption.  7.  Desires  and 
productive  capacity.  8.  "The  cost  of  high  living."  9.  Desires  and 
ultimate  wealth.  10.  Desires  and  association  of  ideas.  11.  Altruistic 
desires.  12.  Desires  and  wants.  13.  Necessities.  14.  Repressibility 
of  desires.  15.  The  standard  of  life.  16.  The  notion  of  scarcity. 
17.  Desirability.  18.  Utility.  19.  Diminishing  desirability.  20.  The 
equal  desirabilities  of  units.  21.  Total  desirability.  22.  Graphic  il- 
lustration of  equal  desirabilities.  23.  Graphic  illustration  of  desira- 
bilities at  different  times.  24.  Marginal  desirability.  25.  The  ten- 
dency to  equality  of  marginal  desirabilities.  26.  Graphic  illustration 
of  this  equality.  27.  Examples  of  marginal  desirability.  28.  Exer- 
cises. 

CHAPTER  VII 

Market  and  Price      123 

1.  What  is  a  market?  2.  Examples  of  a  market.  3.  Transporta- 
tion extends  the  market.  4.  Wheat  is  sold  in  a  broad  market.  5. 
Transporting  costs  taken  into  account.     6.  The  demand  at  Liverpool. 

7.  The  communication  of  information.     8.  Market  ratios  and  price. 

9.  The  market  price  at  equating-point  between  market  supply  and 
market  demand.  10.  The  problem  of  price.  11.  The  price  level. 
12.  Price-making.  13.  Conditions  of  price-making:  (I)  One  seller 
without  a  marginal  limit.  (II)  One  seller  with  a  marginal  limit.  (Ill) 
A  number  of  sellers  with  marginal  limit.  (IV)  Two-sided  competition. 
14.  Exercises. 

CHAPTER  VIII 
Value  and  Demand 144 

1.  Price,  a  restatement.  2.  Value.  3.  Value  is  an  individualistic 
matter.  4.  "The  paradox  of  value."  5.  Surplus  and  the  limit  to 
exchanges.     6.  Decision    in    directing    expenditures.     7.  Valuation. 

8.  Caution  in  the  use  of  supply  and  demand.     9.  Amount,  supply. 

10.  Price-making  illustrated,  n.  Market  demand  and  market  sup- 
ply. 12.  Definitions  illustrated.  13.  Unrevealed  price  limits  of  buy- 
ers and  sellers.  14.  Elasticity  of  market  demand.  15.  Complemen- 
tary goods.  16.  Prospective  prices  and  present  demand.  17.  De- 
mand curve.  18.  Demand:  Questions  and  answers.  19.  Recapitula- 
tion.    20.  Exercises. 


x  Contents 


CHAPTER  DC 

PAGE 

Supply     x72 

i  Supplies;  their  variety,  adjustment,  and  limitations.  2.  Pur- 
chasing power  and  supply.  3-  Fixed  supplies.  4.  Senior's  statement. 
5.  Cost  denned.  6.  Cost  and  limitation  of  factors.  7.  Cost  and  the 
price  of  product.  8.  Cost  a  price  expression  of  limitation  of  agents. 
9.  Supplies  limit  each  other.  10.  Competition  of  supplies.  11.  In- 
creasing cost.  12.  Opportunity  cost.  13.  Kinds  of  opportunity  cost. 
14.  Past  cost  and  present  supply;  Present  cost  and  future  supply.  15. 
Selling  below  cost.  16.  Joint  cost.  17.  Movements  in  market  sup- 
ply. 18.  Movements  in  supply  curve.  19.  Recapitulation.  20.  Ex- 
ercises. 

CHAPTER  X 

Money  and  Its  Purchasing  Power i95 

1.  Money  and  price.  2.  Money  in  exchange.  3.  Barter  and  need 
for  money.  4.  What  is  money?  5.  The  definition  explained.  6. 
Functions  of  money.  7.  Credit,  currency,  cash.  8.  Qualities  of  good 
money.  9.  Coinage.  10.  Free,  unlimited,  gratuitous  coinage,  n. 
Money  exchanged  by  weight  and  by  count.  12.  Seigniorage.  13. 
Seigniorage  and  the  purchasing  power  of  money.  14.  Other  illustra- 
tions. 15.  Seigniorage  in  the  monetary  system  of  the  United  States. 
16.  Monetary  system  of  the  United  States,  1915.  17-  The  mint  price 
and  the  market  price  of  gold  bullion.  18.  Convertibility  of  money. 
19.  Exercises. 

CHAPTER  XI 

Money  and  Its  Purchasing  Power  (continued)  ...   220 

1.  Can  the  government  make  money?  2.  A  conservative  view  of 
fiat  money.  3.  Greenbacks  and  prices.  4.  Fiat  money  a  monopoly. 
5.  Marginal  desirability  and  value:  A  restatement.  6.  The  marginal 
use  of  money.  7.  It  is  the  exchange  function  only  that  imparts  de- 
sirability to  money.  8.  The  purchasing  power  of  money.  9.  Real 
income  and  the  price  level.  10.  Two  meanings  of  the  purchasing 
power  of  money,  n.  Effect  of  increasing  gold  production.  12.  The 
quantity  theory  of  money.  13.  Misunderstandings  answered.  14. 
The  number  of  goods:  N.  15.  Price  movements  not  uniform.  16. 
The  price  level  determined  by  means  of  index  numbers.  17.  Simple 
index  numbers.  18.  Weighted  index  numbers.  19.  The  purposes  of 
index  numbers.     20.  Exercises. 


Contents  xi 

CHAPTER  XII 

PAGE 

Money  Standards 251 

1.  Money  movements  automatic.  2.  Selection  of  coins.  3.  Gresh- 
am's  law.  4.  When  Gresham's  law  will  not  work.  5.  Bimetallism. 
6.  The  compensatory  principle.  7.  The  meaning  of  terms.  8.  When 
bimetallism  will  not  work.  9.  When  bimetallism  will  work.  10.  Ar- 
guments for  bimetallism.  11.  Argument  against  bimetallism  consid- 
ered. 12.  Historical  summary.  13.  A  summary  review.  14.  Free- 
silver  agitation  of  1896.  15.  The  gold  standard  on  trial.  16. 
Different  standards  defined.     17.  Exercises. 

CHAPTER  XIII 
Credit  and  Banking 279 

1.  Credit  as  a  substitute  for  money.  2.  All  classes  use  credit.  3. 
Credit  defined.  4.  The  basis  of  credit.  5.  Credit  facilitates  produc- 
tion. 6.  The  danger  of  credit.  7.  The  general  and  limited  accepta- 
bility of  credit  instruments.  8.  Bank  credits.  9.  Banks  as  reser- 
voirs of  capital.  10.  Deposits,  n.  Deposits  lower  the  purchasing 
power  of  money.  12.  Time  deposits.  13.  Liabilities  and  assets. 
14.  The  operations  of  a  bank.  15.  The  value  of  a  bank's  liabilities. 
16.  Capital  items.  17.  Reserves.  18.  Other  assets.  19.  The  lead- 
ing safeguard  of  a  bank.  20.  The  agency  of  clearing-houses.  21. 
Payments  by  checks  between  different  communities.  22.  Bank-notes. 
23.  Exercises. 

CHAPTER  XIV 

Banking  Legislation  in  the  United  States    ....     305 

1.  Introductory.  2.  Centralized  banking.  3.  The  Bank  of  France. 
4.  Banking  prior  to  National  Banks.  5.  The  free  banking  system 
of  New  York.  6.  The  National  Bank  act.  7.  Provisions  of  the  act. 
8.  Defects  of  the  system.  9.  Decentralization  of  banking.  10. 
Inelasticity  of  credit,  n.  Distribution  of  banking  facilities.  12. 
Banking  and  foreign  trade.  13.  New  system  demanded.  14.  The 
Federal  Reserve  act.  15.  The  Federal  Reserve  Board.  16.  The  re- 
serve banks.  17.  Federal  Reserve  notes.  18.  Reserves  of  Federal 
Reserve  banks.  19.  Reserves  in  member  banks.  20.  Noteworthy 
features  of  the  law.     21.  Exercises. 


xii  Contents 

CHAPTER  XV 

PAGE 

The  Organization  of  Production 331 

1.  National  forces  co-operate  in  war.  2.  The  co-operant  forces  of 
industry.  3.  The  automatic  adjustment  in  industry.  4.  Adjust- 
ments never  complete.  5.  Quantitative  precision.  6.  The  services  of 
men  standardized.  7.  The  test  of  production  not  on  moral  grounds. 
8.  The  test  of  production  not  tangibility.  9.  Social  production  refers 
to  amount.  10.  Individualistic  and  social  view-points,  n.  The  en- 
trepreneur. 12.  Functions  of  the  entrepreneur.  13.  The  entrepre- 
neur is  a  self-employed  middleman.  14.  The  entrepreneur  as  ser- 
vant of  demand.  15.  The  uses  of  materials.  16.  Direct  and  indirect 
uses  of  goods.     17.  The  agencies.     18.  Exercises. 

CHAPTER  XVI 
The  Law  of  Proportionality     352 

1.  Complementary  agents.  2.  The  principle  of  resistance.  3.  Phys- 
ical intensive  utilization.  4.  Turgot's  statement.  5.  These  facts 
expressed  in  money  terms.  6.  Intensive  margin  of  utilization.  7. 
Extensive  margin  of  utilization.  8.  What  lands  or  land  uses  are  culti- 
vated? 9.  Equality  of  intensive  and  extensive  margins.  10.  Sub- 
stitution. 11.  The  law  of  proportionality.  12.  Bearing  of  propor- 
tionality on  the  distribution  of  wealth.  13.  How  the  price  of  agents 
affects  proportionality  14.  The  elastic  limit  of  factors.  15.  Ex- 
tent of  market.  16.  Quantity  and  money  returns.  17.  Summary 
conclusion.     18.  Exercises. 

CHAPTER  XVII 
The  Renting  Contract 374 

1.  Introduction.  2.  Definition  of  rent.  3.  Durable  goods  rented. 
4.  Buying  or  renting.  5.  Use-value  derivative.  6.  The  renting  con- 
tract prospective.  7.  The  time  element  in  rent.  8.  Short  factors 
and  high  rent.  9.  What  is  high  rent?  10.  Monopoly  rents.  11. 
Product  returns  vs.  money  returns.  12.  The  tendency  toward  di- 
minishing money  returns  universal.  13.  Large  production  and 
monopoly.  14.  Conditions  for  study  of  principle  of  increasing  resist- 
ance. 15.  Rent  a  deduction  from  the  principle  of  increasing  resist- 
ance. 16.  Proportionality  and  rent.  17.  Rent  limited  by  income. 
18.  Rents  limited  by  cost  of  reproduction.  19.  Differential  rent.  20. 
Differentials  a  measure  rather  than  a  cause  of  rent.  21.  Difference 
in  fertility.  22.  Difference  in  costs.  23.  Differences  in  location. 
24.  The  owner's  income.     25.  Exercises. 


Contents  xiii 

CHAPTER  XVIII 

PAGE 

Population  and  the  Supply  of  Labor 399 

1.  The  supply  of  labor:  Location.  2.  The  supply  of  labor:  Indus- 
trial. 3.  The  supply  of  labor:  Non-competing  groups.  4.  J.  E. 
Cairnes.  5.  The  supply  of  labor,  peculiarities  of.  6.  Alfred  Mar- 
shall. 7.  The  order  of  treatment.  8.  Population — a  world  problem. 
9.  Views  of  the  seventeenth  and  eighteenth  centuries  favorable  to  the 
increase  of  numbers.  10.  The  attitude  in  new  countries.  11.  The 
limit  to  this  progress.  1 2.  Why  some  competitors  favor  a  large  popu- 
lation. 13.  The  attitude  in  different  forms  of  government.  14.  En- 
vironment of  Thomas  Robert  Malthus.  15.  The  Malthusian  theory. 
16.  The  persistence  of  the  doctrine.  17.  Rates  of  birth  and  death. 
18.  Malthus's  emphasis  on  the  positive  check.  19.  Progress  from 
pressure.  20.  President  Hadley's  statement.  21.  Doctrines  logically 
following  Malthusianism.  22.  The  simplicity  of  Malthus's  basic  as- 
sumption. 23.  Private  property  and  family  development.  24.  The 
influence  of  freedom  and  public  education.  25.  Conclusion  on  the 
limit  of  numbers.     26.  Exercises. 

CHAPTER  XIX 

Labor  and  Machinery 429 

1.  Labor  defined.  2.  Labor,  direct  and  indirect.  3.  The  demand 
for  labor,  4.  Variety  of  demand.  5.  The  "make- work"  fallacy. 
6.  Broken-pane  philosophy.  7.  "Good  for  the  trade."  8.  The 
"  lump-of-labor  "  fallacy.  9.  Questions  raised  by  the  introduction  of 
machinery.  10.  The  laborer's  view-point.  11.  These  hardships  on 
the  decline.  12.  Machinery  and  market  demands.  13.  Machinery 
improves  the  laborer.     14.  Exercises. 

CHAPTER  XX 
The  Principles  of  Wages 449 

1.  Wages  defined.  2.  Problems  suggested.  3.  Wages  differ  from 
profits.  4.  Real  and  money  wages.  5.  The  wage-fund  doctrine. 
6.  The  wage  problem  is  forward-looking.  7.  Effect  of  machinery 
upon  wages.  8.  Similarity  of  wages  and  rent.  9.  The  same  principles 
for  unlike  agents.  10.  How  relative  rents  ace  determined,  n.  How 
relative  wages  are  determined.  12.  Thought  and  execution.  13.  To 
illustrate.  14.  The  wage  system  in  proportionality.  15.  The  bar- 
gain theory.  16.  The  wage  system.  17.  Equal  wages  for  equal 
tasks.  18.  Wages  equal  the  marginal  product  of  labor.  19.  The 
time  element.     20.  Exercises. 


xiv  Contents 

CHAPTER  XXI 


PAGE 


Capital 467 

1.  Introduction.  2.  Marginal  desirability.  3.  The  labor-cost 
theory  of  value.  4.  Criticisms.  5.  Productive  agents  classified.  6. 
Interest  as  wages  of  past  labor.  7.  Rent  in  the  labor-cost  theory. 
8.  Bases  of  criticism.  9.  Only  valuable  land  is  cultivated.  10.  A 
productive  agent  as  a  composite  of  different  single  factors.  11.  Any 
factor  which  is  an  integral  part  of  a  productive  agent  is  valuable. 
12.  Valueless  land  and  valueless  composite  agent.  13.  Marginal  land. 
14.  Other  arguments.  15.  Land  as  capital.  16.  Capital.  17.  Cap- 
ital contrasted  with  wealth.  18.  Acquisitive  powers  which  are  not 
wealth.  19.  Extension  of  the  capital  concept.  20.  Capital  a  right 
to  income.     21.  Exercises. 


CHAPTER  XXII 
Interest     489 

1.  The  productivity  theory.  2.  The  interest  rate  unaffected  by 
variation  in  production.  3.  Unproductive  loans.  4.  The  money 
fallacy.  5.  Variation  of  bank  interest.  6.  Gross  interest  and  net 
interest.  7.  Time-discount.  8.  Illustration.  9.  Time-discount  in 
capitalization.  10.  Capitalization  and  interest,  n.  Adjustment  of 
interest  to  capitalization.  12.  The  present  worth  of  a  bond.  13. 
Money  loans  analogous  to  investments.  14.  The  interest  rate  reflects 
time-discount.  15.  Fallacy  of  inversion.  16.  Interest  involved  in 
simple  exchanges.  17.  Preference  for  present  possession.  18.  Ap- 
parent exceptions.  19.  The  consumption  idea.  20.  Reasons  for  dif- 
ferences in  time-discount  among  persons. 


CHAPTER  XXIII 

Interest,  Further  Considered jn 

1.  Determining  a  rate  of  interest.  2.  Borrowers.  3.  Adjust- 
ments in  the  market.  4.  The  supply  side  of  the  money  market.  5. 
The  order  of  thought:  Production  and  discount.  6.  Questions  and 
answers  involving  the  foregoing  principles.     7.  Exercises. 


Contents  xv 


CHAPTER  XXIV 

PAGE 

Forms  of  Industrial  Ownership:  The  Corporation   .   527 

1.  Introduction.  2.  Individual  ownership.  3.  Limits  to  private 
ownership.  4.  Partnership.  5.  Limited  partnerships.  6.  The  dis- 
advantages of  a  partnership  are  many.  7.  Joint-stock  association. 
8.  Corporations.  9.  The  advantages  of  corporations.  10.  General 
corporation  acts.  n.  Directors.  12.  Election  of  directors:  Dummy- 
directors.  13.  Cumulative  voting.  14.  Inside  information  of  stock- 
holders. 15.  Negotiability  of  stock-certificates.  16.  Securing  funds. 
17.  Funds  from  creditors.  18.  Issuing  notes.  19.  Issuing  bonds. 
20.  Issuing  stocks  and  bonds.  21.  Questionable  practices.  22. 
Remedies.  23.  Foresight  in  business.  24.  An  educational  transfor- 
mation is  now  in  process.     25.  Exercises. 

CHAPTER  XXV 

Large-Scale  Production  and  Monopoly     556 

1.  Control  by  best  talent.  2.  Selection  of  men.  3.  Distribution  of 
talent.  4.  Standardization  aids  the  purchaser.  5.  Steady  demand  in 
a  broad  market.  6.  The  quantity  of  demand.  7.  Other  advantages 
of  large  production,  with  or  without  monopoly  power.  8.  The  best 
size  of  establishment.  9.  Some  advantages  of  monopoly.  10.  Cut- 
throat competition,  n.  Two  types  of  establishments.  12.  Lower 
costs  from  costlier  tools.     13.  The  cost  of  tools  limited  by  saving. 

14.  The  competitor.  15.  Factors  should  reproduce  themselves.  16. 
Monopoly  control.  17.  Advertising  waste.  18.  Salesmanship.  19. 
Inequality  of  classes.  20.  Elimination  of  independent  businesses.  21. 
Monopoly  deadens  initiative.  22.  Summary  and  conclusion.  23. 
Conclusion  of  chapter.     24.  Exercises. 

CHAPTER  XXVI 
Monopoly  and  Monopoly  Price 582 

1.  Motive  in  competition  and  monopoly.  2.  The  test  of  monop- 
oly. 3.  Temporary  monopoly.  4.  Capitalistic  monopolies.  5.  Other 
forms  of  monopoly.  6.  Skilled  labor.  7.  Legal  monopolies.  8.  Nat- 
ural monopolies.  9.  Quasi-natural  monopolies.  10.  Voluntary  and 
enforced  patronage,  n.  Limitation  of  the  market.  12.  A  summary 
of  market    limitations.     13.  Monopoly  price.     14.  Increasing  costs. 

15.  Institutions  of  diminishing  costs.  16.  Monopoly  prices  vary. 
17.  Domestic  and  export  prices.  18.  Limitations  on  monopoly 
price.     19.  Exercises. 


xvi  Contents 

CHAPTER  XXVII 

FACE 

Control  of  Trusts      602 

1.  Trust  defined.  2.  Pools.  3.  Statements  in  point  by  Taussig 
and  Jenks.  4.  Railroads  during  the  World  War.  5.  The  situation  at 
the  close  of  the  war.  6.  The  legal  form  of  trusts.  7.  From  trusts  to 
holding  companies.  8.  From  holding  companies  to  mergers.  9.  The 
purpose  of  trust  legislation.  10.  The  hazard  of  the  business  man.  11. 
Competition  and  attempt  to  monopolize.  12.  Common  law  on  re- 
straint of  trade.  13.  Laissez-faire  and  control.  14.  The  Sherman 
Anti-Trust  law.  15.  The  prevention  of  trusts.  16.  The  Standard 
Oil  case.  17.  Prevention  or  destruction.  18.  Trust  regulation.  19. 
Need  of  further  legislation.  20.  Unfair  methods  of  competition.  21. 
The  anti-trust  legislation  of  1914.  22.  The  Federal  Trade  Commis- 
sion. 23.  Holding  companies  and  interlocking  directorates.  24.  The 
Webb-Pomerene  act.     25.  Exercises. 

Index 633 


INTRODUCTION  TO  ECONOMICS 


INTRODUCTION   TO    ECONOMICS 

CHAPTER   I 

INTRODUCTION:     THE    BEGINNING    OF 
ECONOMIC    INSTITUTIONS 

i.  The  science  of  economics.  2.  Requirements  of  the  economist.  3. 
Mistakes  in  early  specialization.  4.  Principles  first,  then  specialization. 
5.  From  objective  to  subjective  control.  6.  Knowledge  is  power.  7. 
From  physical  to  mental.  8.  Three  stages  of  progress.  9.  The  hunter 
stage.  10.  The  pastoral  stage.  11.  Domestication  and  indirect  produc- 
tion. 12.  Conflicting  interests.  13.  Pressure  and  progress.  14.  Tribal 
property.  15.  Variety  and  trade.  16.  Self-sufficiency.  17.  The  agricul- 
tural stage.  18.  What  the  agriculturist  must  know.  19.  Three  essentials 
of  thrift.  20.  A  settled  life.  21.  Production  and  civilization.  22.  Slav- 
ery. 23.  The  conclusion.  24.  From  primitive  to  manoral  times.  25. 
Feudalism.  26.  The  manoral  system  in  England.  27.  Ashley's  picture  of 
the  eleventh-century  manor.  28.  Tenants.  29.  Self-sufficiency  on  man- 
ors.    30.  The  relation  of  property  to  government.     31.  Exercises. 

i.  The  Science  of  Economics. — Science  originates  in 
man's  endeavor  to  answer  the  eternal  question  "why." 
In  answer  to  this  question,  thinkers  are  ever  on  the  alert 
to  detect  agreements  and  differences  among  things.  The 
untutored  see  a  million  phenomena,  but  these  in  chaotic 
mass.  The  scholar  sees  the  same  phenomena,  but  subjects 
these  to  law  and  order.  He  ties  things  with  like  qualities 
into  a  bundle  by  themselves,  and  this  bundle  is  the  subject- 
matter  of  a  science. 

Why  are  there  panics  in  the  business  world?  Why 
does  the  cost  of  living  continue  to  rise?     Why  does  a 

movie  actor  get  more  for  a  single  performance  than  a 

l 


2  Introduction  to  Economics 

common  laborer  gets  for  a  year's  work?  Why  is  there 
mutual  profit  in  trading?  Why  do  we  have  monopolies? 
and  why  are  some  monopoly  prices  high  and  others  low  ? 

Problems  of  this  sort  are  legion,  but  when  exposed  to 
examination  they  are  found  to  exist  in  causal  relationship. 
They  may  be  tied  into  one  bundle,  and  they  form  the 
subject-matter  of  one  science- — the  science  of  Economics. 

2.  Requirements  of  the  Economist. — This  group  of 
related  thought  is  subject  to  scientific  classification  and 
inquiry.  But  the  ability  to  make  such  classification  im- 
plies a  grasp  of  the  principles  which  underlie  the  science. 
New  specimens  of  animals  must  remain  stray  individual 
curiosities  to  him  who  is  ignorant  of  the  eight  great  sub- 
kingdoms  of  animals.  Likewise,  no  rigorous  classification 
of  the  varied  business  phenomena  is  possible  apart  from 
the  fundamental  economic  laws  which  these  phenomena 
obey. 

The  student  incapable  of  comprehending  beyond  his 
five  senses  is  advised  to  let  economics  alone,  for  the  char- 
acteristic feature  of  this  science  is  the  interdependence  of 
its  subject-matter.  A  sixth  sense  is  required,  that  of  the 
detection  of  hidden  relations.  In  addition  to  this  sense, 
the  mental  equipment  of  a  first-rate  economist  comprises, 
first  of  all,  greatness  of  mind,  then  breadth  of  scholarship, 
and  finally  the  knowledge  of  application  which  converts 
dead  facts  into  quick  thought. 

3.  Mistakes  in  Early  Specialization. — The  surest  road  to 
failure  as  an  economist  is  for  the  student  to  begin  with  a 
special  branch  of  the  subject  and  pursue  it  to  the  exclu- 
sion of  other  studies.  Specialization  there  must  be,  but 
this  does  not  imply  ignorance  of  all  excepting  one's  chosen 
field.     Each  separate  field  of  inquiry  furnishes  its  own  par- 


The  Beginning  of  Economic  Institutions      3 

ticular  type  of  training,  method  of  thought,  and  point  of 
view.  The  mere  specialist,  who  cannot  bring  to  his  aid 
the  assistance  of  liberal  training,  can  grasp  facts  but  not 
situations,  can  solve  isolated  problems,  but  cannot  deal 
with  them  in  the  broad  aspect  of  their  relationships  with 
current  economic  activities.  Like  the  perverted  eye  spe- 
cialist who  would  prescribe  for  his  patient  with  a  sour 
stomach  a  new  pair  of  spectacles,  there  are  narrow  special- 
ists in  labor,  or  money,  or  trusts,  who  would  treat  all  eco- 
nomic ills  from  their  one  limited  point  of  view. 

4.  Principles  First,  then  Specialization. — An  economic 
fact  is  never  an  isolated  datum;  it  is  always  the  result  of 
a  combination  of  forces.  To  think  through  an  economic 
problem  requires  mental  power  sufficient  to  marshal  forces 
to  a  common  end,  and  sufficient  mental  balance  to  see 
forces  in  their  proper  state  of  poise,  for  if  any  force  is  not 
given  its  due  weight,  the  conclusion  will  be  either  only 
partially  correct  or  wholly  wrong.  Two  separate  forces 
guide  the  earth  around  the  sun:  overemphasis  upon  the 
one  leads  to  the  conclusion  that  the  earth  must  fly  away 
into  empty  space;  the  direful  conclusion  from  overempha- 
sizing the  other  must  be  that  the  earth  will  fall  into  the 
sun  and  be  consumed  in  fire.  If  one  treats  lightly  the 
power  of  volitional  control  and  overemphasizes  procreation, 
he  must  conclude  that  the  growth  of  population  will  out- 
strip the  means  of  subsistence,  resulting  thus  in  actual 
starvation  and  premature  death  from  disease.  If  one 
would  approach  his  specialty  in  economics  with  a  proper 
mental  poise,  he  must  first  put  himself  in  command  of  the 
general  principles  of  the  science. 

5.  From  Objective  to  Subjective  Control. — In  his  primi- 
tive state  man,  like  the  animals  about  him,  lived  from  the 


4  Introduction  to  Economics 

gratuitous  fruits  of  nature.  He  produced  no  article  of 
food,  drink,  or  clothing,  but  hunted  things  and  appropri- 
ated them.  Every  step  of  his  progress  from  savagism  to 
the  highest-attained  civilization  has  been  marked  by  im- 
proved instrumentalities.  Back  of  all  physical  develop- 
ments, however,  were  his  developments  in  knowledge.  In 
power  of  body  and  swiftness  of  foot,  in  keenness  of  scent, 
taste,  hearing,  and  sight,  man  is  an  inferior  in  the  animal 
world.  His  power  of  supremacy  is  in  his  power  of  mind, 
and  as  this  power  is  weaker  he  is  more  nearly  an  animal, 
and  thus  more  dependent  upon  the  free  gifts  of  nature. 
As  this  power  is  stronger,  however,  he  more  and  more 
controls  the  animals  about  him,  and  so  directs  the  laws 
of  nature  that  they  do  his  bidding. 

6.  Knowledge  is  Power. — For  time  out  of  mind  men 
have  seriously  debated  as  to  which  controls,  nature  or 
man.  The  contenders,  pro  and  con,  would  have  ceased 
their  vain  parleys  long  since,  had  they  paused  to  define 
the  word  "control,"  for,  indeed,  the  whole  contention  has 
been  a  play  upon  this  one  word.  Whether  man  levels  ob- 
stacles or  goes  around  them  is  of  no  consequence;  it  is 
enough  to  know  that  he  is  not  compelled  to  suffer  them. 
One  argues  that  man  deceives  himself  in  the  "magnanimous 
claim  that  he  conquers  nature,  for  man's  part  is  that  of 
adapting  himself  to  natural  forces  which  he  can  neither 
create  nor  annihilate."  The  implication  is  that  to  con- 
quer is  to  annihilate.  These  terms  have  little  in  common; 
the  pugilist  who  lands  the  knock-out  blow  conquers,  but 
does  not  annihilate  his  adversary.  Call  it  conquer,  adap- 
tation, or  what  not,  the  issue  of  importance  in  man's  eco- 
nomic development  is  this:  His  knowledge  of  natural  forces 
is  cumulative,   and  this  knowledge  is   the  power  which 


The  Beginnijig  of  Economic  Institutions       5 

enables  him  to  levy  tribute  upon  nature  for  the  necessities, 
comforts,  and  luxuries  of  life.  The  peculiarity  of  a  natural 
law  is  that  it  obeys  only  as  it  is  obeyed.  Learning  this 
peculiarity,  man  in  obedience  to  nature's  law,  directs  her 
forces  to  the  end  of  gratifying  his  desires.  In  the  direction 
of  natural  forces,  truly  "knowledge  is  power." 

7.  From  Physical  to  Mental. — The  knowledge  of  these 
forces  gives  rise  to  inventions  which  harness  and  set  them 
to  work.  As  the  artist  exhibits  his  thought  on  canvas  or 
chisels  it  in  marble,  so  the  scientist  exhibits  his  thought  in 
the  form  of  ingenious  devices  calculated  to  make  easier 
the  labor  of  man,  and  to  allot  to  natural  forces  a  larger 
share  in  production.  In  order  of  supremacy  nature  was 
first,  and  then  man — first  the  supremacy  of  objective  laws 
and  finally  that  of  subjective  laws. 

The  development  of  sciences  has,  with  few  exceptions, 
taken  precisely  the  same  order — first  the  objective  or 
physical  sciences  and  then  the  moral  or  mental  sciences. 

During  the  seventeenth  and  eighteenth  centuries  the 
laws  of  physical  science  engrossed  the  attention  of  scholars. 
Thinkers  followed  a  method  and  point  of  view  which  was 
in  strict  keeping  with  the  order  of  thought  prevailing  in 
the  physical  sciences.  At  this  time  economics  had  its 
beginning,  and  what  could  be  more  natural  than  that  the 
physical  elements  of  this  science  should  have  been  vital- 
ized? The  mental  aspects  of  the  subject  were  neglected 
almost  as  if  they  were  beyond  scientific  statement,  and  so 
vividly  were  the  objective  laws  painted  by  the  old  masters 
that  they  came  to  obsess  the  economists,  and  this  holds 
true  for  many  devotees  of  the  subject  even  in  our  own 
time. 

As  we  progress  through  the  following  pages,  we  shall  see 


6  Introduction  to  Economics 

how  mental  laws  step  by  step  take  predominance  over 
physical  force,  how  they  motivate  all  economic  activity 
and  direct  the  operations  of  all  economic  forces. 

8.  Three  Stages  of  Progress.— The  history  of  economic 
progress  bears  witness  to  the  truth  of  the  above  observa- 
tions. Even  prior  to  authentic  history,  conjectural  study 
permits  this  classification  of  economic  progress: 

The  hunter  stage. 
The  pastoral  stage. 
The  agricultural  stage. 

9.  The  hunter  stage  sees  man,  devoid  of  industrial 
equipment  and  ignorant  of  natural  laws,  living,  as  the 
brute  beasts  about  him,  upon  such  wild  fruits,  nuts,  and 
animal  flesh  as  he  could  find  and  appropriate.  He  was 
subject  to  nature's  lottery  of  weather,  be  it  fair  or  foul, 
and  enjoyed  abundance  or  suffered  want  as  the  seasons 
varied.  From  hand  to  mouth,  and  from  feast  to  famine, 
he  neither  took  forethought  nor  made  provision  for  the 
morrow.  Having  no  fixed  abode,  such  private  property 
as  may  have  been  his  was  of  a  movable  type,  and  formed 
an  integral  part  of  his  own  personality.  He  had  brain  for 
thought  but  no  ideas  upon  which  to  build.  His  single 
handicap  was  his  want  of  scientific  knowledge,  for,  had  he 
this,  he  could  have  given  shape  to  tools  and  form  to  new 
industries  that  would  have  lifted  him  from  the  level  of  the 
brute  beast  to  the  higher  plane  of  human  supremacy. 
Wholly  subservient  to  nature  and  without  vision  for  the 
future,  he  contributes  no  lesson  to  the  modern  science  of 
economics. 

10.  The  Pastoral  Stage. — Different  conjectures  have 
been  made  as  to  how  or  why  man  came  to  domesticate 
animals.     The  "pet  theory"   seems   to  prevail;   namely, 


The  Beginning  of  Economic  Institutions       7 

that  some  of  the  savages  who  caught  young  animals  would 
prefer  to  amuse  themselves  by  playing  with  the  captives 
rather  than  destroying  them  for  food.  This  contact  be- 
tween savage  and  pet  enabled  the  former  to  learn  the  value 
of  the  latter,  enabled  him  to  make  selection  among  ani- 
mals, retaining  the  more  serviceable,  and  killing  or  driving 
away  the  objectionable  ones.  Domestication  has  long 
since,  even  long  before  the  beginning  of  authentic  history, 
been  accomplished.  "It  is  worthy  of  remark,"  says  Pro- 
fessor Carver,  "that  our  branch  of  the  human  race  has 
not  reduced  a  single  new  animal  to  domestication  since 
the  beginning  of  recorded  history." 

11.  Domestication  and  Indirect  Production. — It  little 
matters  how  animals  came  to  be  domesticated — this  much 
is  certain,  a  long  step  was  made  toward  civilization  when 
man  learned  to  secure  indirectly  the  means  of  subsistence 
through  the  agency  of  animals.  The  shepherd,  although  a 
wanderer  in  search  of  pasture,  had  a  more  abundant  and 
certain  food-supply  than  did  the  hunter  in  the  previous 
stage.  We  cannot  overstate  the  importance  to  civiliza- 
tion of  the  art  of  conserving  and  distributing  products 
through  time.  Were  crops  consumed  and  destroyed  as 
produced,  we  could  not  survive  the  winter  or  non-produc- 
ing seasons;  without  saving  there  could  be  no  cumulative 
wealth,  no  durable  agencies  of  production,  no  provision 
for  sickness  or  old  age.  Values  would  fluctuate  panic-like 
from  one  season  to  another,  and  no  settled  state  of  eco- 
nomic life  could  exist.  The  utilization  of  animals  made  a 
great  contribution  to  the  stability  of  economic  life  by  way 
of  furnishing  milk,  eggs,  and  meat  in  recurring  order. 

12.  Conflicting  Interests. — But  these,  like  most  economic 
blessings,  gave  rise  to  conflicts  of  interests.     There  are  men 


8  Introduction  to  Economics 

to-day  who  reason  that,  because  land  is  a  free  gift  of  nature, 
each  and  all  should  have  a  free  and  equal  license  to  the 
use  of  it.  And  so  the  shepherds  reasoned  in  the  days  of 
old.  Tribal  property  in  herds,  however,  proved  contrary 
to  the  idea  of  equal  rights  for  all  tribes  to  the  same  land. 
It  seemed  a  monstrous  idea,  contrary  to  justice,  that  the 
herd  of  one  tribe  should  occupy  a  favored  pasture  to  the 
exclusion  of  other  herds.  As  the  population  grew  and 
herds  multiplied,  contests,  even  tribal  warfare,  arose  over 
the  occupancy  of  the  better  pastures.  The  plan  of  Abra- 
ham and  Lot  proved  best  when  they  agreed  that  property 
in  herds  made  necessary  also  property  in  land.  They 
agreed  to  separate  and  each  restrict  his  pasturing  within 
fixed  bounds,  for  the  land  was  limited  and  the  herds  were 
multiplying,  thus  giving  rise  to  frequent  quarrels. 

13.  Pressure  and  Progress. — The  ancient  herdsmen  have 
taught  us  yet  another  lesson,  namely,  that  the  pressure  of 
numbers  is  a  cause  of  progress.  The  sequence  of  more 
people,  more  herds,  and  less  land  for  each  herd,  forced  the 
tribes  to  invent  means  for  a  more  intensive  use  of  land. 
This  led  them  to  classify  plants  in  order  that  they  might 
proceed  to  destroy  the  unfit  and  to  multiply  the  more  use- 
ful.    Thus  economic  pressure  gave  birth  to  agriculture. 

14.  Tribal  Property. — Still  another  lesson  we  inherit 
from  the  experience  of  the  ancient  shepherd.  A  tribe  is  a 
group  of  related  persons  who  claim  descent  from  a  com- 
mon ancestor.  One  was  admitted  to  membership  in  the 
tribe  only  when  he  stood  the  test  of  blood-relationship; 
the  fact  that  he  might  live  in  the  same  geographic  area 
furnished  no  reason  why  he  should  be  admitted  to  the 
tribe,  although  it  might  furnish  decisive  reason  why  he 
should  be  decapitated.     Thus  the  tribe  was  a  large  family 


The  Beginning  of  Economic  Institutions       9 

with  one  family  religion,  government,  and  a  common  own- 
ership of  property.  What  we  call  private  property  to-day 
is,  for  the  most  part,  the  ownership  of  wealth  by  the  family, 
which  wealth  is  directed  by  the  head  of  the  family. 

15.  Variety  and  Trade. — But  the  property  of  that  day 
was  too  similar  in  nature  to  give  rise  to  extensive  trading 
among  tribes.  Extensive  trade  implies  variety  in  produc- 
tion, and  the  possession  of  unlike  things  by  the  several 
traders.  It  is  when  production  is  subdivided  into  many 
parts  that  there  is  need  for  considerable  trading.  The 
reason  for  little  trading  among  tribes  is  that  all  followed 
the  same  occupation. 

16.  Self-Sufficiency. — Where  there  is  no  trading  the  con- 
sumer must  depend  upon  his  own  production  for  support. 
Where  a  person,  family,  community,  or  tribe — without  the 
intervention  of  trade — supplies  its  own  provisionings,  it 
lives  in  a  "state  of  self-sufficiency." 

We  shall  find  that  self-sufficiency  also  characterizes  the 
agricultural  stage  of  economic  progress. 

17.  The  Agricultural  Stage. — We  have  seen  how  a  growth 
of  population  led  to  economic  pressure,  and  this,  in  turn,  to 
a  higher  stage  of  production — the  agricultural  stage.  We 
shall  see  that  a  further  growth  of  population  gave  rise  to 
an  extension  of  man's  knowledge,  that  he  was  forced  to 
devise  improved  arts  of  husbandry,  and  to  extend  further 
the  principle  of  ownership  or  property. 

A  problem  to  be  solved  sets  the  mind  to  work  in  search 
of  a  solution.  This  truth  has  many  bearings:  human  ail- 
ments gave  rise  to  the  science  of  medicine;  injustice  among 
men  called  into  being  the  science  of  law  in  order  that  jus- 
tice might  be  had;  maladjustments  in  nature  made  need 
for  the  science  of  engineering;  and  the  pressure  of  a  grow- 


10  Introduction  to  Economics 

ing  population  upon  the  earth  for  subsistence  made  de- 
mand for  the  science  of  agriculture. 

18.  What  the  Agriculturist  Must  Know. — Much  knowl- 
edge is  required  in  order  that  man  may  make  wise  selec- 
tion among  plants  as  to  the  fittest  types  for  cultivation,  in 
order  that  he  may  adjust  the  different  types  of  plants  to 
the  proper  qualities  of  soil,  in  order  that  he  may  know 
when  and  how  to  plant,  to  cultivate,  and  to  reap.  The 
further  demand  for  necessities  must  needs  increase  this 
fund  of  scientific  knowledge  in  order  that  the  land  may 
produce  more.  Soil  must  b°  utilized  more  intensively, 
and  the  area  of  cultivation  extended  to  include  new  lands. 
Swamps  must  be  drained  and  arid  lands  irrigated.  Fer- 
tilizers must  be  manufactured  and  these  adopted  in  right 
proportions  to  the  different  qualities  of  soil. 

Human  history  records  no  more  worthy  examples  of  the 
growth  in  knowledge  than  these:  development  of  systems 
in  the  rotation  of  crops  to  prevent  soil  exhaustion;  increas- 
ing discoveries  regarding  the  effect  of  different  kinds  of 
crops  upon  the  chemical  qualities  in  soil;  extension  in  the 
art  of  grafting  and  in  the  selection  of  seeds.  Additional  to 
these,  and  not  less  remarkable  in  development,  comes  the 
breeding  and  improvement  of  animals.  The  knowledge 
here  indicated  is  of  later  date  than  in  the  stage  of  progress 
under  consideration;  it  is  high  credit  to  that  remote  age 
that  it  began  this  development  which  we  now  so  fully 
enjoy. 

19.  Three  Essentials  of  Thrift.— Such  is  the  nature  of 
agriculture  that,  even  in  its  first  stages,  it  becomes  socially 
necessary  for  men  to  acquire  these  three  essentials  of  thrift, 
namely,  foresight,  abstinence,  and  a  higher  respect  for  pri- 
vate property.     Land  must  be  cleared  and  improvements 


The  Beginning  of  Economic  Institutions     1 1 

made  for  their  future  yield.  Likewise,  foresight  is  required 
in  making  necessary  improvements,  in  the  preservation  of 
flocks,  or  in  planting  now  in  order  to  reap  at  a  later  date. 
Foresight  gives  rise  to  abstinence.  The  former  points  out 
foreseen  opportunities  or  future  difficulties,  and  calls  upon 
abstinence  to  be  sparing  now  in  order  to  save  for  the 
future  need.  Abstinence  in  its  turn  requires  a  high  respect 
for  property  rights,  for  one  can  save  only  that  which  he 
owns.  One  could  not  save  his  garden-vegetables,  neither 
would  he  labor  to  produce  them,  apart  from  the  institution 
of  property,  for  then  all  who  enjoy  vegetables  would  be 
permitted  to  help  themselves. 

20.  A  Settled  Life. — Not  least,  probably  greatest,  among 
the  influences  of  agriculture  upon  civilization  is  the  fact 
that  men  were  forced  to  cease  wandering  and  settle  down. 
The  old  shepherds  could  drive  their  flocks  from  one  grazing- 
place  to  another,  but  the  farmer's  property,  being  immov- 
able, required  him  to  maintain  a  fixed  abode.  This  gave 
origin  to  home  life,  to  more  durable  social  relations  among 
men,  and  to  the  beginning  of  social  institutions.  As  for 
building,  it  is  safe  to  say  that  men  on  the  march  had  no 
need  for  durable  structures,  but  among  the  first  demands 
made  by  a  fixed  abode  is  that  of  structures  more  or  less 
durable.  Lands  and  houses,  moreover,  created  a  further 
extension  of  private  property  in  the  form  of  household 
goods  and  chattels. 

21.  Production  and  Civilization. — Civilization  does  not 
imply  a  static  situation  or  fixed  state  of  accomplishment; 
it  signifies  a  progressive  interaction  between  the  inner  man 
and  his  environment.  There  is  no  separating  the  history 
of  production  from  the  history  of  civilization;  the  one  may 
almost  be  defined  in  terms  of  the  other.     The  production 


12  Introduction  to  Economics 

of  the  press  gave  wing?  to  knowledge  and  enlightened  man- 
kind. The  production  of  gunpowder,  which  made  foot- 
soldiers  superior  to  armored  knights,  robbed  the  feudal 
caste  of  its  strength,  and  worked  to  the  equalization  of 
man.  The  production  of  trade  facilities  introduced  into 
each  community  the  different  kinds  of  goods,  the  variety 
in  consumption,  the  different  methods  and  ideas  known  to 
every  other  section.  The  advanced  civilization  of  ancient 
times  in  the  Mediterranean  basin,  in  some  respects  un- 
equalled even  in  our  own  time,  took  its  origin  and  found 
its  development  in  the  art  of  trade. 

Whether  it  be  the  spread  of  religion,  education,  or  lib- 
erty; whether  it  be  the  power  to  bridge  rivers,  tunnel 
mountains,  or  sail  the  seas;  whether  it  be  improvement  in 
the  quality  and  variety  of  food,  clothing,  or  shelter — what- 
ever the  blessing,  even  to  life  itself,  it  must  go  back  for  its 
explanation  to  the  one  word:  production.  But  rapid  prog- 
ress depends  upon  variety  in  production.  Agriculture 
made  possible  a  large  yield  of  food  upon  a  limited  area  to 
support  a  large  and  settled  population.  It  enabled  a  por- 
tion of  the  population  to  produce  enough  farm-produce  for 
all.  thus  liberating  a  portion  of  the  people  who  turned 
their  efforts  to  new  lines  of  industrv.  Manufacturing 
and  commercial  cities  came  into  being,  and  with  them 
the  beginnings  of  a  division  of  labor  and  varied  produc- 
tion. 

In  early  times  cities  sprang  up  in  the  valleys,  and  by 
overland  routes  were  enabled  to  trade  with  distant  places. 
City-dwellers  devoted  their  time  to  hand-work  of  all  sorts. 
In  the  Tigris.  Xile.  and  Euphrates  valleys,  in  particular, 
there  are  records  of  flourishing  trade  between  country  and 
city  people. 


The  Beginning  of  Economic  Institutions      13 

22.  Slavery. — A  noteworthy  phase  of  the  extension  oT 
private  property  during  this  stage  was  the  captivity  and 
enslavement  of  human  beings.  Is  slavery  to  be  justified? 
Yes  and  no.  During  the  early  st  iges  in  human  develop- 
ment the  introduction  of  slavery  is  a  step  forward.  Tribes 
and  races  of  people  never  enslave  their  own  members;  the 
slaves  of  a  tribe  or  race  are  the  captives  from  another  tribe 
or  race.  Previous  to  the  time  when  it  became  profitable 
to  enslave  the  captives,  they  were  killed  by  their  conquer- 
ors. Slavery  is  justified  when  the  issue  becomes  either 
the  loss  of  liberty  or  the  loss  of  Lire. 

In  the  second  place,  the  primitive  man  preferred  to 
plunder  rather  than  to  work;  it  was  with  difficulty  that  he 
could  be  induced  to  work  at  all.  Prejudice  aside,  our  bet- 
ter judgment  would  welcome  slave-labor  as  a  vast  im- 
provement over  the  free  idleness  of  savage  plunderers. 

But  the  economics  of  slavery  goes  deeper.  The  time 
under  review  was  prior  to  the  introduction  of  improved 
tools  and  labor-saving  machinery.  Labor  was  performed 
by  hand  with  the  aid  of  a  few  crude  instrumentalities. 
Superior  workmanship  upon  the  land,  requiring  special- 
ized knowledge,  had  not  yet  made  its  appearance.  Only 
muscular  labor  for  heavy,  coarse  work  was  needed.  Such 
labor  may  be  performed  by  slaves.  But  this  must  be 
added:  the  slave  has  no  more  interest  in  the  quality  of  the 
good  he  produces  or  in  the  price  for  which  it  will  sell  than 
the  horse  has  in  the  load  that  it  pulls.  It  follows  that, 
without  incentive  for  improvement,  the  products  of  his 
labor  must  remain  of  a  crude  and  rough  type. 

While  cultivation  was  in  the  beginning  stages,  land  was 
so  plentiful  and  cheap  that  it  figured  but  little  in  the  ex- 
penses of  production,  and  tools  were  a  negligible  factor. 


14  Introduction  to  Economics 

Under  thefee  conditions  men  thought  of  the  cost  of  produc- 
tion almost  wholly  in  terms  of  muscular  labor.  Put  dif- 
ferently, labor  was  the  limiting  factor  of  production  and, 
therefore,  the  expensive  factor.  This  fact,  coupled  with 
the  coarse  type  of  production  then  required,  made  slave- 
labor  very  profitable. 

Slave-labor,  however,  is  not  a  free  good.  Prior  to  cap- 
tivity those  destined  to  become  slaves  are  valueless,  but 
so  also  are  the  fur-bearing  animals  of  Siberia  while  still  in 
their  native  haunts.  Subject  these  to  human  control, 
however,  and  value  and  price  are  forthwith  attached. 
He  who  sells  furs  will  not  hesitate  to  attach  a  price  because 
the  product  was  once  a  free  good.  Here  we  have  learned 
a  first  principle  in  the  value  problem;  namely,  the  thing 
valued  must  be  subject  to  control.  Moreover,  if  slaves 
are  reared  from  infancy,  the  process  is  both  time-consum- 
ing and  expensive.  The  matter  comes  to  this:  slaves  are 
expensive  to  rear  and  maintain;  they  represent  invested 
capital;  they  are  sold  at  prices  corresponding  with  their 
productive  capacity.  Whether  one  will  hire  free  labor  or 
buy  slaves  is  very  like  the  problem  whether  it  is  better  to 
buy  a  home  or  rent.  The  two  problems  differ  in  this — 
one  can  buy  a  superior  house,  but  he  cannot  buy  superior 
slave-labor. 

23.  The  conclusion  to  which  we  are  brought  is  in  strict 
keeping  with  the  history  of  the  case.  As  industries  de- 
velop and  are  broken  up  into  specialized  parts,  the  pro- 
ducers require  skilled  labor  and  labor  that  is  readily  ad- 
justable to  the  varying  demands  of  a  changing  market. 
Machinery  comes  into  use,  thus  making  a  demand  for 
mechanical  skill.  Then,  too,  the  varying  needs  of  the 
market  require  the  business  man  to  have  on  hand  a  large 


The  Beginning  of  Economic  Institutions     1 5 

labor  force  at  one  time,  whereas  in  slack  periods  few  work- 
men are  needed.  Thus  the  free-wage  system  in  an  open 
labor  market  fills  the  requirements  of  modern  conditions 
better,  and  in  a  manner  far  more  economical,  than  could 
slave-labor. 

24.  From  Primitive  to  Manorial  Times. — Between  the 
primitive  economy  we  have  so  hastily  reviewed  and  the 
manorial  economy  now  to  be  studied  there  was  a  long 
lapse  of  time.  Nor  was  this  time  without  its  interesting 
lessons  for  the  economist.  During  this  period  economic 
changes  brought  about  the  decay  of  certain  institutions 
and  gave  rise  to  others  of  a  new  and  higher  form.  I  say 
economic  changes,  not  the  plans  of  a  great  leader  or  group 
of  influential  men,  forced  the  remodelling  of  institutions 
so  that  they  conform  in  time  and  step  with  the  march  of 
human  progress. 

25.  Feudalism. — As  stated  by  the  Yale  historian,  Pro- 
fessor B.  G.  Adams,  "It  is  almost  impossible  even  with 
the  most  discriminating  care  to  give  a  brief  account  of 
completed  feudalism  and  convey  no  wrong  impression." 
And  he  quotes  De  Quincey  thus:  "It  is  a  natural  resource 
that  whatsoever  we  find  it  difficult  to  investigate  as  a  result, 
we  endeavor  to  follow  as  a  growth.  Failing  analytically 
to  probe  its  nature,  historically  we  seek  relief  to  our  per- 
plexities by  tracing  its  origin.  .  .  .  Thus,  for  instance, 
when  any  feudal  institution  eludes  our  deciphering  faculty 
from  the  imperfect  records  of  its  use  and  operation,  then 
we  endeavor  conjecturally  to  amend  our  knowledge  by 
watching  the  circumstances  in  which  that  institution 
arose."1 

The  circumstances  under  which  feudalism  arose  were 

xEncy.  Brit.,  eleventh  ed.,  vol.  10,  p.  300. 


16  Introduction  to  Economics 

two:  (a)  For  centuries,  particularly  in  Greece  and  Rome, 
men  had  developed  their  industries  and  arts  until  civiliza- 
tion had  reached  a  high  level.  But  in  the  fourth,  fifth, 
and  sixth  centuries  the  migrations  of  barbarian  hordes 
from  the  north  worked  havoc  with  the  political  and  eco- 
nomic environment  of  the  people  and  laid  this  splendid 
civilization  in  ruins,  (b)  Existing  social  institutions  had 
to  be  transformed  to  meet  new  requirements. 

The  new  situation  is  difficult  of  explanation  because  of 
the  confusion  which  prevailed.  Nor  was  the  situation 
everywhere  the  same.  But  this  much  was  true  then  as  it 
is  to-day:  the  object  of  organized  tyranny  takes  the  form 
of  murder,  loot,  pillage,  and  destruction.  This  brought 
the  peaceful  arts  into  neglect,  the  superb  Roman  roads 
into  disuse,  commerce  into  abandonment,  and  the  power 
of  sovereign  governments  into  a  state  of  disintegration. 

Everywhere  a  cry  arose  for  protection — protection 
against  the  sudden  attacks  of  invading  tribes,  against  op- 
pressive neighbors,  against  exacting  government  officers, 
and  against  unwarranted  taxes  of  the  governments  them- 
selves. In  almost  every  relation  of  life  and  on  every  side 
the  weak  freeman  and  small  landholder  were  attacked, 
yet  the  decaying  empires  were  incapable  of  extending  re- 
lief. Protection,  which  normally  it  is  the  business  of  the 
government  to  furnish,  had  to  be  sought  elsewhere,  and  at 
whatever  price  might  be  demanded  for  it. 

The  safest  guarantee  of  the  helpless  against  the  formida- 
ble invaders  was,  in  many  cases,  to  group  in  small  com- 
munities and  put  themselves  under  the  protection  of  a 
powerful  leader  or  expert  fighter.  But  the  protection  of 
this  chief  personage  was  not  free  from  charge;  he  held 
the  land  and  granted  protection  in  return  for  payments 


The  Beginning  of  Economic  Institutions     17 

and  services.       And  this  was  the  origin  of  the  manorial 
system. 

26.  The  Manorial  System  in  England. — It  would  not 
serve  our  purpose  to  trace  the  peculiarities  of  the  origin  of 
this  system  in  England.  It  is  enough  to  say  that  in  their 
conquest  of  1066  the  Normans  found  the  system  in  opera- 
tion and  took  advantage  of  it  as  a  convenient  basis  for 
reorganizing  the  kingdom.  To  the  victor  belonged  the 
spoils,  and  William  the  Conqueror,  with  generous  hand, 
granted  the  existing  manors  to  his  followers.  Not  content 
with  this,  the  Doomsday  Survey,  one  of  the  most  complete 
surveys  of  agricultural  resources  ever  made,  was  carried  out, 
and  the  entire  kingdom  was  divided  among  favored  land- 
lords. 

27.  Ashley's  Picture  of  the  Eleventh-Century  Manor.1 

"Let  us  picture  to  ourselves  an  eleventh-century  manor 
in  Middle  or  Southern  England.  There  was  a  village  street, 
and  along  each  side  of  it  the  houses  of  the  cultivators  of 
the  soil,  with  little  yards  around  them:  as  yet  there  were 
no  scattered  farmhouses,  such  as  were  to  appear  later. 
Stretching  away  from  the  village  was  the  arable  land, 
divided  usually  into  three  fields,  sown  one  with  wheat  or 
rye,  one  with  oats  or  barley,  while  one  was  left  fallow. 
The  fields  were  again  subdivided  into  what  were  usually 
called  'furlongs';  and  each  furlong  into  acre  or  half-acre 
strips,  separated,  not  by  hedges,  but  by  'balks'  of  un- 
ploughed  turf;  and  these  strips  were  distributed  among  the 
cultivators  in  such  a  way  that  each  man's  holding  was 
made  up  of  strips  scattered  up  and  down  the  three  fields, 
and  no  man  held  two  adjoining  pieces.  Each  individual 
holder  was  bound  to  cultivate  his  strips  in  accordance 
with  the  rotation  of  crops  observed  by  his  neighbors. 
Besides  the  arable  fields,  there  were  also  meadows,  enclosed 
for  hay-harvest,  and  divided  into  portions  by  lot  or  rota- 

1  Ashley's  Introduction  to  English  Economic  History  and  Theory,  book 
I,  pp.  6-7. 


18  Introduction  to  Economics 

tion  or  custom,  and  after  hay-harvest  thrown  open  again 
for  the  cattle  to  pasture  upon.  In  most  cases  there  was 
also  some  permanent  pasture  or  wood,  into  which  the  cat- 
tle were  turned,  either  'without  stint'  or  in  numbers  pro- 
portioned to  the  extent  of  each  man's  holding." 

28.  Tenants. — Those  who  lived  under  the  direction  of 
the  manor  were  under  compulsion  to  render  some  form  of 
assistance  in  the  cultivation  of  the  lord's  land.  The  vil- 
lagers may  be  classified  as  free  tenants,  villeins,  handi- 
craftsmen, and  slaves.  Free  tenants  made  their  payments 
to  the  lord  in  money  or  in  kind.  When  one  pays  in  kind 
he  tenders  a  portion  of  what  he  produces;  thus  payment 
in  kind  might  consist  of  eggs,  poultry,  vegetables,  or  grain. 
This  class  of  tenants  were  socially  superior  to  the  next  or 
villein  class,  who  rendered  their  pay  in  manual  labor. 
Handicraftsmen  were  little  more  than  common  slaves  who 
performed  various  functions  upon  the  estates  and  in  the 
household.  The  Normans  found  that  slaves  constituted 
about  nine  per  cent  of  the  population  of  England.  Slavery 
formed  no  integral  part  of  manorial  life.  Absolute  slavery 
disappeared  within  a  century  after  the  conquest  (1066.) 
Slaves  became  customary  holders  of  small  plots,  but  under 
onerous  conditions. 

29.  Self -Sufficiency  on  Manors. — Each  manor  was  a 
community  existing  apart  from  others.  Such  would-be 
roads  as  might  connect  these  communities  were  too  dan- 
gerous for  commerce  because  the  traveller  was  subject  to 
outlawry.  The  records  indicate  that  almost  the  whole  of 
what  the  manors  purchased  from  the  outside  were  these 
essentials:  millstones,  salt,  and  iron  for  the  making  of 
tools.  Each  manor  developed  its  own  customs,  and  pro- 
vided its  own  court,  church,  and  mill.     It  provided  food, 


The  Beginning  of  Economic  Institutions     19 

clothing,  and  the  other  necessities  for  its  own  needs.  The 
manorial  system  furnishes  an  excellent  example  of  the 
economy  of  self-sufficiency. 

30.  The  Relation  of  Property  to  Government. — We  have 
seen  how  among  primitive  peoples  the  institution  of  prop- 
erty took  its  beginning  and  extended  its  growth.  We  now 
see  the  relationship  of  this  institution  to  government. 
Property  implies  power,  the  power  to  control.  In  a  well- 
established  government  the  social  power  is  organized  in 
the  sovereignty  of  the  state.  The  state  may  delegate  to 
persons  or  corporations,  full,  partial,  or  no  property  rights, 
as  it  wills.  Moreover,  the  power  to  delegate  a  property 
right  implies  the  power  to  take  it  away.  If  the  expression 
of  the  sovereign  power,  in  the  form  of  votes,  should  declare 
against  private  property,  that  moment  the  institution 
would  die.  When  the  old  governments  began  to  decay, 
power  passed  from  the  states  to  the  expert  fighters,  and 
with  this  transfer  went  the  transfer  of  the  power  that  is 
property.  But  the  fighter  has  a  self-interest  which  the 
state  has  not,  and  he  will  not,  therefore,  be  so  generous 
in  his  grants  of  property  as  would  be  the  state. 

Self-interest  implies  a  personal  greed  that  would  make 
levy  upon  the  wealth,  even  upon  the  person,  of  others. 
And  the  motive  of  self-interest  predominates  the  rule  of  a 
person,  be  he  the  lord  of  a  manor  or  the  ruler  of  a  great 
people.  Should  Cuba,  for  instance,  come  under  the  com- 
plete domination  of  a  single  great  ruler,  her  people  would 
be  levied  upon  for  contribution,  and  their  holdings  be 
modified  to  conform  to  the  self-interest  of  that  ruler. 

The  characteristics  of  a  democratic  government,  on  the 
contrary,  are  unselfishness  and  the  rule  of  common  sense. 
Guizot  was  right  when  he  said:  "Common  sense  is  the 


20  Introduction  to  Economics 

characteristic  of  humanity."  A  democratic  government 
is  the  organized  form  of  the  will  of  humanity.  These  facts 
teach  us  in  the  United  States  not  to  take  alarm  because  of 
the  great  and  growing  accumulations  of  private  wealth. 
Nor  need  we  fear  the  opposite  extreme  of  unbridled  social- 
ism. Social  institutions  are  always  on  trial,  open  to  in- 
spection, to  inquiry,  and  under  experiment.  The  common 
sense  of  the  people  outweighs  that  of  the  would-be  reformer, 
and  these  people  are  free  to  vote  institutions  in  or  out. 
They  may  move  too  slowly  for  the  impatient,  but  in  the 
end  the  institutions  which  are  good  and  fit  will  survive, 
while  the  bad  and  unfit  will  be  eliminated. 

Under  the  lord  of  the  manor  there  could  be  no  individual 
liberty,  in  the  sense  in  which  we  understand  it,  and,  in 
consequence,  no  private  property.  Men  were  forbidden 
to  sell  any  product  without  the  lord's  permission;  they 
were  bound  to  the  soil  as  much  as  the  trees  upon  it;  their 
services  were  at  the  disposal  of  the  lord;  their  position  was 
little  superior  to  that  of  slaves. 

31.  Exercises. — 1.  How  does  a  science  originate,  and 
what  is  the  essential  condition  that  any  discipline  may 
become  a  science  ? 

2.  Shall  a  piece  of  coal  be  studied  in  geology,  botany, 
physics,  chemistry,  or  economics?     (Fetter.) 

3.  Write  a  description  of  one  of  the  three  stages  of  prog- 
ress mentioned  in  paragraph  8. 

4.  Why  was  the  domestication  of  animals  of  great  eco- 
nomic importance?  "Invention  and  machinery  is  but  fur- 
thering the  progress  which  had  its  beginning  in  the  domes- 
tication of  animals."     Justify  this  statement. 

5.  "Economic  pressure  gave  birth  to  agriculture"  (para- 
graph 13)  and  to  property  rights.  Tell  why  this  statement 
is  true. 


The  Beginning  of  Economic  Institutions     21 

6.  How  did  agriculture  bring  about  foresight,  abstinence, 
a  higher  respect  for  private  property,  and  a  settled  life  ? 

7.  Are  there  any  conditions  under  which  slavery  is  jus- 
tifiable?   If  so,  what  are  they? 

8.  Apart  from  political  and  moral  considerations,  could 
slavery  exist  in  an  advanced  stage  of  industrial  develop- 
ment ?    Defend  your  answer. 

9.  What  were  the  circumstances  under  which  feudalism 
arose  ? 

10.  Write  a  description  of  the  eleventh-century  manor 
in  England. 

1 1 .  What  does  the  word  property  mean  ?  How  is  it  re- 
lated to  government? 


CHAPTER   II 

ENGLISH  GUILDS  AND  THE  DECLINE  OF  LOCAL 

RESTRICTIONS 

i.  Manas  user  of  tools.  2.  The  interdependence  of  industries  in  a  civil- 
ized state.  3.  The  old  and  new  in  England's  development.  4.  Develop- 
ment of  great  wealth.  5.  Isolation  Lnd  local  unity.  6.  The  alliance 
against  lords  of  manors.  7.  Guilds.  8.  The  Guild  is  an  economic  institu- 
tion. 9.  Merchant  guilds.  10.  In  France.  11.  The  craft  guilds.  12.  The 
Hundred  Years'  War  between  England  and  France.  13.  Changes  during 
the  war:  in  religion;  in  language;  knighthood;  the  Black  Death;  the  Peas- 
ants' Revolt  of  1381;  enclosures.     14.  Exercises. 

1.  Man  as  User  of  Tools. — Man  differs  from  the  lower 
animals  in  two  respects:  first,  he  is  provided  with  reason 
that  enables  him  to  make  things,  and,  secondly,  he  is  not 
provided,  as  are  the  lower  animals,  with  the  means  of  pro- 
tection, or  with  provision  for  bodily  comfort,  and  such  is 
his  digestion  that  he  requires  a  superior  quality  of  food. 
His  mental  capacity  give?  him  the  power  and  his  natural 
shortcomings  give  him  the  motive,  or  furnish  the  neces- 
sity, for  him  to  invent  things.  The  making,  or,  if  a  longer 
word  is  preferred,  the  manufacturing,  of  things  must  have 
been  practised  from  the  earliest  times,  otherwise  the  race 
could  not  have  survived.  Even  in  the  hunting  stage  there 
must  have  been  at  least  some  crude  instruments. 

2.  The  Interdependence  of  Industries  in  a  Civilized 
State. — When  man  raised  himself  above  the  level  of  ani- 
mals and  began  a  civilized  life  he  found  that  tools  were  not 
less  needed  than  the  land  itself.  The  resources  of  nature 
and  the  tools  of  production  are  to  each  other  as  the  mouth 

22 


English  Guilds  and  Local  Restrictions      23 

is  to  the  stomach,  for  neither  could  support  man  in  a 
degree  of  comfort  without  the  co-operation  of  the  other. 

We  have  said  that  agriculture  requires  a  settled  state 
of  living;  it  should  be  added  that  the  tilling  of  the  soil  also 
requires  the  population  to  be  scattered.  On  the  contrary, 
manufacturing  or  the  source  of  tools,  particularly  in  a 
civilized  state,  calls  for  congregated  labor  and  for  the  ex- 
change of  goods.  Manufacture  and  trade  find  most  facili- 
ties and  must,  for  the  most  part,  exist  in  towns  or  cities. 
Whether  cities  attract  manufactories  or  are  built  up  around 
them  is  not  a  question  debatable;  they  each  react  upon  the 
other  and  grow  together. 

Within  a  well-organized  society  agriculture  is  supplied 
with  tools  and  finished  products  from  the  city,  and  the 
city  is  supplied  with  raw  materials  from  the  farm.  They 
are  interdependent;  towns  feed  from  the  surplus  of  agri- 
culture, and  the  tillers  of  the  soil  draw  their  finished  prod- 
ucts from  the  workshops  of  the  town.  This  interdepen- 
dence or  mutual  benefit  is  effected  through  the  agency  of 
commerce. 

If  agriculture  should  decline,  the  towns  will  decay  and 
commerce  must  diminish.  So  mutually  dependent  are 
these  three  parts  of  industry  that  the  weakness  of  one 
means  the  infirmity  of  all.  How  they  develop  together  as 
one  large  movement  is  well  exemplified  in  the  industrial 
development  of  England. 

3.  The  Old  and  New  in  England's  Development. — Eng- 
lish commerce  now  covers  every  sea,  and  there  is  not  a 
port  the  world  over  unfrequented  by  her  ships  of  trade. 
So  commanding  is  her  position  in  trade  that  all  peoples  of 
the  earth  quote  their  international  exchanges  in  terms  of 
her  finance.    Her  giant  institutions  of  finance  are  the 


24  Introduction  to  Economics 

models  of  excellence  for  the  rest  of  mankind.  Her  manu- 
facturing cities  and  productive  agriculture,  her  harbors 
and  rivers,  her  beds  of  iron  and  coal,  are  so  bound  together 
by  a  network  of  railways  as  to  make  of  the  whole  a  veritable 
workshop.  The  opportunities  before  her  people  are  great, 
but  not  as  great  as  are  the  people  who  made  them.  Her 
capitalists,  enterprisers,  and  laborers  are  of  the  highest 
order,  and  worthy  of  their  great  attainments. 

The  area  of  England,  including  Wales,  is  but  a  little 
over  one-fifth  of  the  area  of  Texas.  It  is  smaller  than 
Missouri  by  11,080  square  miles,  yet  it  supports  in  a  high 
state  of  comfort  nearly  40,000,000  of  souls. 

Contrast  the  England  of  to-day  with  the  England  that 
the  Normans  found  in  1066.  The  total  population  re- 
corded in  the  Doomsday  numbered  but  283,242.  Certain 
omissions  were  made  in  that  great  survey,  and  Ashley  esti- 
mates the  total  numbers  at  1,500,000,  although  he  says: 
"This  estimate  is  probably  too  high."  It  is  safe  to  say 
that  in  the  eleventh  century  all  England  supported  an 
impoverished  population  which  numbered  fewer  by  a 
quarter  of  a  million  than  does  the  city  of  Philadelphia. 

So  striking  a  contrast  in  the  industrial  orders  of  the  two 
periods  suggests  an  educational  contrast,  because  indigence 
and  poverty  keep  the  company  of  ignorance,  while  a  high 
state  of  well-being  is  inseparable  from  education.  To 
quote  from  Green's  Short  History:  "Instead  of  long  fronts 
of  venerable  colleges,  of  stately  walks  beneath  immemorial 
elms,  history  plunges  us  into  the  mean  and  filthy  lanes  of 
a  mediaeval  town.  Thousands  of  boys,  huddled  in  bare 
lodging-houses,  clustering  around  teachers  as  poor  as  them- 
selves in  church  porch  and  'house  porch — drinking,  quarrel- 
ling, dicing,  begging  at  the  corners  of  the  streets— take 


English  Guilds  and  Local  Restrictions      25 

the  place  of  the  brightly-colored  train  of  Doctors  and 
Heads — Mayor  and  Chancellor  struggle  in  vain  to  enforce 
order  or  peace  on  this  seething  mass  of  turbulent  life." 

4.  Development  of  Great  Wealth. — The  land  is  not 
more  now  than  then,  nor  has  nature  added  to  its  fertility. 
Whence  this  change  from  a  sparse  population,  barely  able 
to  eke  out  a  living,  to  a  large  population  living  in  a  state 
of  abundance?  The  Normans  injected  into  England  new 
blood,  new  ideas,  and  money-lending  which  gave  rise  to 
a  new  form  of  industrial  evolution.  This  evolution  was 
the  work  of  forces  in  society  itself,  operating  upon  their 
material  environment.  In  our  own  country  not  more  than 
500,000  American  Indians  could  maintain  a  meagre  ex- 
istence where  now  dwell  60,000,000  or  more  of  the  most 
prosperous  people  of  which  there  is  record.  The  powers 
of  knowledge  are  the  seeds  of  development,  and  these, 
united  with  a  rich  environment,  are  the  cause  of  great 
wealth  wherever  it  is  found. 

But  the  development  in  knowledge  and  power  of  appli- 
cation is,  as  we  have  said,  coincident  with  variety  in  pro- 
duction, and  such  variety  is  impossible  apart  from  the 
production  of  a  surplus  in  agriculture.  This  surplus  was 
small  on  the  English  manors,  and  so  the  small  towns,  or 
manufacturing  villages,  numbered  not  more  than  eighty 
at  the  time  of  the  Conquest. 

5.  Isolation  and  Local  Unity. — The  population  dwelt 
either  upon  manors  or  in  towns,  and  was,  therefore,  divided 
into  small  isolated  groups.  For  want  of  good  roads  and 
safe  travel  the  different  groups  had  little  in  common,  but 
there  was  close  personal  association  within  groups.  Per- 
sonal contact,  together  with  a  oneness  of  interest,  produced 
a  strong  sense  of  unity  that  enabled  the  group  to  act  as  a 


26  Introduction  to  Economics 

corporate  body.  In  the  absence  of  a  strong  protecting 
government  self-preservation  was  imposed  upon  the  group, 
thus  making  more  desirable  the  power  to  act  as  a  corporate 
body. 

6.  The  Alliance  Against  Lords  of  Manors. — While  the 
towns  and  manors  were  similar  in  some  respects,  they  dif- 
fered in  others.  The  citizens  of  the  town  were  free;  they 
had  many  rights  of  self-government,  among  others  the 
right  to  levy  taxes,  regulate  trade,  and  administer  justice. 
This  freedom  caused  serfs  to  flee  from  the  oppression  of 
the  feudal  lords,  and  go  to  the  towns,  where  they  were 
accepted  and  made  freemen.  The  lords  of  the  manors 
resented  this,  for  it  threatened  their  power,  and  rivalries 
arose  between  the  lords  of  the  manors  and  the  manufactur- 
ing cities. 

The  government  did  not  hesitate  to  favor  the  cities,  be- 
cause the  power  of  some  lords,  who  were  jealous  of  the 
King  himself,  was  so  great  as  to  threaten  the  safety  of  the 
state.  The  self-interests  of  both  the  King  and  the  towns- 
people made  an  alliance  for  mutual  benefit  inevitable. 
The  dwellers  in  cities  received  from  the  King  special  privi- 
leges in  the  form  of  royal  charters,  and  they  repaid  the 
King  with  contributions  to  the  royal  exchequer  and  a 
promise  of  unswerving  loyalty  in  time  of  emergency. 

Being  a  centre  of  manufacture  and  trade,  it  is  but  natural  . 
that  the  first  request  of  a  town  would  be  for  the  special 
privilege  of  monopoly  in  its  line  of  trade.     This  brings  us 
to  the  formation  of  guilds — a  new  type  of  economic  insti- 
tution. 

7.  Guilds. — As  the  manor  was  limited  to  agriculture,  so 
the  guild  was  limited  to  manufacture  and  trade.  Some 
historians  reason  that  guilds  have  grown  out  of  the  spirit 
of  brotherhood  in  Christianity;  others  see  them  as  a  con- 


English  Guilds  and  Local  Restrictions      27 

tinuation  of  the  old  Roman  fraternities;  others  advance 
the  theory  that  guilds  are  derived  from  the  early  Scandi- 
navian banquets.  These  unlike  theories  have  this  in  com- 
mon— guilds  are  the  outgrowth  of  a  pre-existing  institution. 
The  economist  could  have  little  confidence  in  such 
theories.  The  ancient  and  noisy  revels  of  the  Scandina- 
vians had  neither  unity  nor  durability  of  association,  and 
these  were  prime  characteristics  of  the  guild.  The  Roman 
fraternities  had  no  continuity,  as  did  the  guild.  Nor  does 
the  guild  suggest  the  spirit  of  Christianity  and  brotherly 
love.  It  was  designed,  on  the  one  hand,  to  form  a  monop- 
oly of  trade  by  keeping  others  out,  and,  on  the  other  hand, 
to  cheat  in  trade. 

8.  The  Guild  Is  an  Economic  Institution,  and  for  the 
explanation  of  such  institutions  we  must  look  into  the 
facts  of  human  nature.  Economic  changes  modify  man's 
behavior  and  give  new  direction  to  his  plans.  An  institu- 
tion is  no  more  than  a  device  for  the  execution  of  a  plan, 
and  must,  therefore,  change  with  the  change  of  plan.  It 
is  a  part  of  man's  nature  to  form  associations,  whether  for 
the  support  of  the  body  or  the  salvation  of  the  soul.  Social 
animals  enjoy  association,  and  where  there  is  a  motive  in 
common  among  men  we  have  the  explanation  for  an  orga- 
nized association  or  institution  to  carry  out  the  motive. 

As  between  the  present  form  of  corporation  with  monop- 
oly power  and  the  guild  of  mediaeval  England  and  Europe 
there  are  many  points  of  difference,  but  back  of  the  form 
the  motive  for  forming  and  the  real  essence  of  the  institu- 
tions is  the  same — that  of  securing  advantage  in  trade 
through  the  possession  of  monopoly  power. 

9.  Merchant  Guilds. — An  organization  which  embodies 
many  interests  is  weaker  and  less  durable  than  one  with 
a  single  interest  and  purpose.     The  merchant  guild  was 


28  Introduction  to  Economics 

comprehensive  in  scope,  covering  all  those  who  had  occa- 
sion to  buy  or  sell  anything  beyond  provisions  for  daily 
use.  Whether  limited,  as  some,  to  trade  within  the  town 
of  its  location,  or  permitted,  as  others,  to  extend  their 
command  of  trade  throughout  the  kingdom,  they  had 
monopoly  power  over  many  lines  of  trade. 

There  was  no  free  competition  where  the  guild  ruled. 
It  bought  and  paid  for  its  rights  in  trade  as  truly  as  it  did 
the  commodities  in  which  it  dealt.  And  these  purchased 
privileges  took  the  form  of  oppressive  regulations  even  to 
the  minutest  details.  When  and  where  might  goods  be 
sold  ?  in  what  quantities  ?  at  what  prices  ?  by  whom  and 
to  whom?  These  and  other  questions  too  numerous  for 
mention  were  subjects  for  definite  regulation  by  the  guilds, 
and  for  enforcement  by  the  wardens  of  the  guild.  To 
break  one  of  these  precious  rules  furnished  an  occasion 
for  public  censure  and  fine,  or  else  imprisonment  and  ex- 
pulsion from  the  guild. 

Note  the  spirit  of  oppressive  regulation  which  character- 
ized that  backward  age.  Whether  in  the  city  guilds  or  the 
country  manors  and  whether  in  England  or  upon  the  con- 
tinent, regulation  was  the  rule. 

10.  In  France. — Prior  to  1798  in  France  the  King  sys- 
tematically obtained  the  choice  bits  of  scandal  by  opening 
private  letters  which  passed  through  the  post;  not  fewer 
than  168  censors  passed  upon  publications;  instead  of  a 
single  code  of  law,  there  was  a  legal  variety  of  300  different 
laws,  which  were  enforced  by  fines,  tortures,  and  mutila- 
tions. The  King  was  wont  to  garner  riches  through  the 
sale  of  monopoly  rights. 

Thus  arose  a  grievous  hindrance  to  trade.  Internal 
commerce  was  harassed  by  frequent  tolls  and   customs 


English  Guilds  and  Local  Restrictions      29 

duties  on  goods  passing  from  province  to  province.  A 
vessel  descending  the  Saone  and  Rhone  Rivers  had  to  stop 
and  pay  charges  as  many  as  thirty  times,  the  whole  amount- 
ing to  from  25  to  30  per  cent  of  the  value  of  the  cargo. 
Hardly  a  trade  or  industry  escaped  the  oppressive  regula- 
tion of  the  guild.  "Each  week  for  a  number  of  years," 
said  an  inspector  of  manufactures,  "I  have  seen  burned 
at  Rouen  80  to  100  pieces  of  goods  because  some  regulation 
concerning  the  weaving  or  dyeing  had  not  been  observed 
at  every  point."1 

11.  The  Craft  Guild. — The  merchant  guild,  with  its 
many  interests,  gradually  gave  way  to  the  craft  guild, 
which  was  stronger  in  organization  because  of  its  oneness 
of  interest.  It  was  an  organization  of  artisans  engaged 
in  the  same  particular  handicraft  or  trade.  Its  rules  were 
not  less  rigorous  nor  less  strictly  enforced  than  in  the  mer- 
chant guild.  Some  of  its  regulations  were  commendable, 
and  similar  rules  are  to-day  insisted  upon  by  governments 
and  trades-unions.  They  provided  for  honest  work,  fra- 
ternal improvements,  correct  weights  and  measures,  and 
against  night  work  in  some  cases,  and  against  the  adultera- 
tion of  products  in  all  cases. 

Within  recent  years  in  the  United  States  we  have  wit- 
nessed the  gradual  decay  of  the  Knights  of  Labor,  embrac- 
ing all  trades  and  classes  of  workers,  and  the  rise  of  trades- 
unions  which  include  only  men  who  work  at  the  same  trade 
and  who,  therefore,  have  a  unity  of  interest.  Very  like 
this  change  from  the  general  to  the  particular  in  unions 
was  the  development  in  the  guilds.  And  so  with  progress 
in  general;  it  is  from  the  general  to  the  particular. 

12.  The   Hundred   Years'   War  between   England   and 

1  Harding's  Essentials  in  Mediaeval  and  Modern  History,  p.  346. 


30  Introduction  to  Economics 

France  came  to  an  inglorious  end  for  England  in  1453. 
Its  ultimate  effect  upon  both  nations  was  the  overthrow  of 
the  oppressive  local  institutions,  among  them  guilds  and 
manors.  The  French  were  victorious  and  took  England's 
continental  possessions,  excepting  Calais.  A  strong  na- 
tional sentiment  was  born,  and  the  prestige  of  the  French 
King  elevated  him  above  his  rivals  and  into  the  position 
of  an  almost  absolute  monarch.  But  not  so  with  the 
Lancastrian  Kings  of  England — in  that  country  Parlia- 
ment increased  its  powers,  even  to  the  control  of  the 
purse.  A  national  spirit  arose,  but  it  was  organized  in 
Parliament  rather  than  in  the  King. 

13.  Changes  During  the  War. — Social  and  economic 
movements  during  this  war  stimulated  the  people  by 
ushering  in  new  lines  of  thought  and  by  breaking  down 
industrial  barriers. 

(a)  Religion:  The  church  had  a  monopoly  of  religion, 
and  had  accumulated  vast  estates  which  were  free  from 
taxation.  John  Wyclif  (1324-1384)  accused  the  clergy  of 
irreligion  due  to  the  close  connection  between  church  and 
state.  Believing  it  Christ's  will  that  the  clergy  remain  poor, 
he  urged  that  the  church  be  disestablished  and  its  property 
confiscated  for  state  use.  He  denied  the  supremacy  of 
the  Pope,  and  disavowed  important  dogmas  of  the  Roman 
Catholic  Church.  Translating  the  Bible  into  English,  he 
openly  revealed  the  teachings  of  the  Scriptures  to  all  read- 
ers. Missionary  priests  were  trained  by  him,  who  went  all 
over  England  teaching  the  people  that  they  were  losing 
the  true  gospel  instruction  necessary  to  save  their  souls, 
and  that  the  great  wealth  of  the  church,  so  needed  by  the 
poor,  was  wasted.  His  followers  (Lollards)  multiplied 
rapidly,  and  twice  it  was  seriously  proposed  in  Parliament 


English  Guilds  and  Local  Restrictions      31 

to  confiscate  the  temporalities  of  the  church.     This  proved 
to  be  a  most  significant  educational  movement. 

(b)  The  Language:  After  1066  the  Norman-French  tongue 
enriched  the  Anglo-Saxon  and  gave  rise  to  the  modern 
English  language.  Chaucer,  in  his  Canterbury  Tales, 
established  the  English  language — "the  King's  English" 
and  portrayed,  in  matchless  style,  the  state  of  English 
society  in  the  middle  of  the  fourteenth  century. 

(c)  Knighthood,  originally  concerned  with  landed  pos- 
sessions and  military  service  on  horseback,  came  to  con- 
cern itself  with  standards  of  honor,  courtesy,  and  duty. 
Its  members  were  pledged  to  aid  the  oppressed,  to  honor 
women,  and  to  maintain  the  right. 

(d)  The  Black  Death  is  italicized  for  its  significant  eco- 
nomic bearings.  A  sweeping  transformation  of  social  in- 
stitutions was  caused  by  this  singular  calamity  known  as 
the  Black  Death.  It  first  ravaged  Europe  and  finally 
reached  England  in  1348.  It  was  a  violent  typhus  fever, 
accompanied  by  eruptions  and  black  blotches  on  the  skin. 
Half  of  the  rural  population  died  within  a  year,  and  the 
death-rate  among  the  clergy  was  particularly  high  because 
their  duties  took  them  to  the  bedside  of  the  sick.  Twenty- 
four  thousand  Franciscan  friars  died.  London,  then  only 
a  small  city,  set  aside  a  cemetery  thirteen  acres  in  extent, 
and  this  was  crowded  with  the  bodies  of  fifty  thousand 
victims  of  the  malady.  Business  came  to  a  standstill,  so 
much  so  that  grass  grew  in  the  market-place  of  Bristol. 
In  short,  the  Black  Death  found  England  with  a  popula- 
tion of  four  millions,  and  left  that  stricken  land  with  but 
two  millions. 

This  was  the  laborer's  opportunity,  and  he  hastened  to 
take  advantage  of  it.     Despite  its  serious  aspects,   this 


32  Introduction  to  Economics 

malady  may  be  called  a  blessing  in  disguise;  probably  no 
war  has  done  more  for  the  liberation  of  mankind.  Labor 
was  suddenly  cut  short,  with  the  result  that  employers  in 
England  and  on  the  Continent  were  set  to  bidding  against 
each  other  for  such  labor  as  was  available.  Wages  ad- 
vanced rapidly  and  villeins,  disregarding  the  protests  of 
their  masters,  declared  their  independence  of  the  manors. 
They  offered  their  services  as  freemen  to  the  highest  bidder 
for  a  money  wage. 

Another  significant  lesson:  The  hard-pressed  employers 
persuaded  Parliament  to  enact  the  "Statute  of  Laborers," 
which  forbade  higher  wages,  and  a  later  law  provided  severe 
punishment  for  runaway  villeins.  Here  we  have  economic 
law  and  legal  law  in  conflict:  The  former  favors  higher 
wages  due  to  the  law  of  supply  and  demand;  the  latter 
favors  low  wages  and  would  arbitrarily  enforce  them.  As 
if  once  was  not  enough,  the  statute  was  re-enacted  thir- 
teen times,  but  all  to  no  avail.  Labor  will  sell  for  its 
worth — not  less  and  not  more — in  a  competitive  market. 
Minimum  wage  advocates  would  do  well  to  contemplate 
more  upon  this  fact. 

(e)  The  Peasants'  Revolt  of  138 1  is  both  an  evidence  of 
the  new  independence  felt  by  labor  and  an  effective  de- 
mand for  the  betterment  of  labor.  This  Statute  of  Labor- 
ers proved  oppressive  to  the  villeins  and  they,  with  the 
townspeople,  resented  the  tolls  which  added  to  their  cost 
of  living.  All  were  burdened  with  a  heavy  tax  to  support 
"a  useless  foreign  war."  Their  long  brooding  over  these 
troubles  prepared  the  way  for  John  Ball,  whose  speeches  to 
the  lower  classes  might  easily  be  mistaken  for  the  language 
of  a  modern  single-taxer.  In  behalf  of  abolishing  class 
distinctions  and  private  property  in  land,  he  said:  "Are 


English  Guilds  and  Local  Restrictions      33 

we  not  descended  from  the  same  parents,  Adam  and  Eve? 
And  what  can  they  [the  upper  classes]  show,  or  what 
reasons  give,  why  they  should  be  more  the  masters  than 
ourselves?  .  .  .  They  are  clothed  in  velvets  and  rich 
stuffs  ornamented  with  ermine  and  other  furs,  while  we 
are  forced  to  wear  poor  cloth;  they  have  wines,  spices,  and 
fine  bread,  when  we  have  only  rye  and  the  refuse  of  the 
straw,  and  if  we  drink,  it  must  be  water;  .  .  .  but  it  is 
from  our  labor  they  have  wherewith  to  support  their 
pomp !" 

Literally  thousands  were  ready  for  revolt  when,  in  1381, 
the  poll-tax  collector  came  along  and  insulted  Wat  Tyler's 
daughter,  only  to  be  struck  dead  by  her  father.  The  fight 
was  on.  Tyler's  friends  in  misery  arose  to  plunder  and 
murder  the  tax-collectors,  and  they  did  no  discriminating, 
in  this  particular,  against  other  government  officers.  Much 
property  was  destroyed  in  their  search  for  the  manor  copy- 
rolls,  which  they  desired  to  burn.  Congregating  in  Lon- 
don, they  demanded  the  abolition  of  villeinage.  Soon 
Tyler  was  killed,  and  the  King  outwitted  the  mob  by 
assuming  the  leadership  of  the  insurgents  and  promising 
redress  of  grievances.  Thirty  clerks  were  put  to  it  to 
draw  up  new  charters,  then  the  insurgents  dispersed. 

Consequences :  The  lords  of  the  manors  ceased  to  be  dic- 
tators, and  had  to  bargain  on  equal  terms  with  labor. 
Wages  were  so  high  that  the  landlords,  for  the  most  part, 
found  more  profit  in  leasing  their  estates  and  stock  in 
small  lots  to  tenants.  Thus  arose  the  modern  type  of 
small  farmer  who  paid  rent  to  the  owner  of  the  land,  and 
he  paid  wages  to  other  laborers. 

(/)  Enclosures:  The  enclosing  of  land  was  the  influence 
to  complete  the  downfall  of  the  manorial  system  and  to 


34  Introduction  to  Economics 

usher  in  a  money  economy.  High  wages  caused  the  old 
form  of  agriculture,  grain-raising,  to  decline;  meanwhile 
sheep-raising  was  becoming  very  profitable.  England  had 
a  good  export  market  for  her  wool,  and  during  the  four- 
teenth century  a  number  of  woollen-factories  were  intro- 
duced into  the  country,  thus  adding  to  the  demand  and 
increasing  the  price  of  the  raw  wool. 

High  wages  were  no  obstacle  to  sheep-raising,  because  a 
shepherd  and  his  dog  could  care  for  a  large  drove  of  sheep. 
The  lords  of  the  manors  found  it  profitable  to  convert 
their  lands  into  sheep-ranches.  Moreover,  large  boun- 
daries of  common  land  were  fenced  in  for  the  same  purpose. 
Many  persons  owned  as  many  as  24,000  sheep,  conse- 
quently the  land  had  to  be  enclosed  into  very  large  pas- 
ture-fields. This  process  of  enclosing  or  fencing  in  land 
is  known  as  "enclosing,"  and  upon  certain  conditions  the 
state  gave  the  encloser  property  in  the  land. 

The  tenants,  with  few  exceptions,  were  forced  to  surren- 
der their  holdings  when  the  land  was  taken  up  in  this 
manner.  Many  of  those  who  enclosed  land  were  non- 
residents, and  due  to  the  fact  that  but  little  labor  was 
needed  to  care  for  the  sheep,  the  tenants  received  little 
consideration  and  were  forced  to  seek  employment  else- 
where. 

Wealthy  merchants  and  professional  men,  desiring  to 
become  landlords,  bought  and  enclosed  lands.  Thus  for 
the  first  time  lands  became  marketable,  and  with  this 
change  rents  rose  ten  and  even  twentyfold.  This  brought 
the  poor  to  the  verge  of  starvation,  and  the  whole  realm 
was  overrun  with  beggars  and  thieves.  Bishop  Latimer, 
a  noted  clergyman  of  that  day,  declared  that  if  every 
farmer  should  raise  two  acres  of  hemp  there  would  not  be 


English  Guilds  and  Local  Restrictions      35 

enough  to  hang  the  thieves.  He  preached  against  the 
change,  but  to  no  avail.  "Let  the  preacher  preach,"  he 
said,  "till  his  tongue  is  worn  to  the  stumps;  nothing  is 
amended." 

Public  resentment  grew  strong,  riots  broke  out  and  the 
government  legislated  against  the  change.  Between  the 
years  1488  and  1624  act  after  act  was  passed  against  en- 
closures, but  all  such  legislation  was  ineffective.  Despite 
severe  hardships  and  opposing  legislation,  industrial  con- 
ditions forced  a  change  to  private  property  in  land.  A 
considerable  portion  of  the  tillable  and  pasture  land  of 
England  was  enclosed  at  that  time. 

14.  Exercises.  1.  What  is  meant  by  the  interdepen- 
dence of  industries  ?  What  is  the  connection  between  the 
development  of  industries  and  the  growth  of  cities? 

2.  Contrast  the  numbers  and  prosperity  of  the  English 
people  to-day  with  the  numbers  and  prosperity  in  1066. 
Make  a  brief  summary  of  the  causes  of  this  development. 

3.  Account  for  the  rise  of  guilds.  What  was  the  differ- 
ence between  merchant  guilds  and  craft  guilds?  What 
was  the  chief  characteristic  of  a  guild? 

4.  Has  economics  anything  to  do  with  religion?  With 
the  development  of  a  language  ?     With  knighthood  ? 

5.  Following  the  Black  Death,  the  Statutes  of  Laborers 
were  passed  in  135 1,  and  subsequent  years.  They  had 
very  little  practical  effect.     Account  for  their  failure. 

6.  Summarize  the  chief  economic  changes  which  fol- 
lowed the  Peasants'  Revolt  of  1381. 

7.  Why  did  sheep-raising  become  so  important  and  ex- 
tensive in  England  during  the  fourteenth  and  fifteenth 
centuries  ? 

8.  Write  a  report  of  one  page  (not  over  300  words) 
which  will  contrast  the  economic  life  of  the  English  people 
before  the  changes  described  in  this  chapter  with  the  eco- 
nomic life  after  the  changes. 


CHAPTER   III 

NATIONAL    CONTROL    AND    THE    INDUSTRIAL 

REVOLUTION 

i.  The  national  system.  2.  Monopolies.  3.  Mercantilism  or  Colbert- 
ism.  4.  Restrictions.  5.  National  ideals.  6.  The  domestic  system.  7. 
The  industrial  revolution.  8.  Commerce  and  need  for  machinery.  9. 
The  beginning  of  industrial  classes.  10.  Scientific  farming.  11.  Control 
of  natural  forces.  12.  The  long  delay.  13.  Changed  point  of  view.  14. 
Social  changes.  15.  The  Physiocrats.  16.  The  freedom  of  trade  and  agri- 
culture. 17.  Political  effects.  18.  Beginning  of  social  legislation.  19.  A 
summary  of  changes  which  affected  wage-earners.  20.  The  formation  of 
labor- unions.     21.  Exercises. 

i.  The  National  System. — The  religious,  educational, 
and  industrial  movements,  which  were  outlined  in  the 
last  chapter,  enabled  the  common  people  to  sense  their 
power.  The  inevitable  result  was  the  breakdown  of  local 
restriction  and  the  rise  of  movements  national  in  scope. 
National  sentiment  became  solidified  under  the  rule  of  the 
strong  and  popular  line  of  Tudors. 

It  was  in  a  period  of  internal  dissension,  when  the  public 

mind  was  prepared  to  welcome  a  ruler  with  power  to  restore 

unity  and  peace,  that  Henry  VII  took  the  throne.     He 

interpreted  well  the  spirit  of  the  time,  and  enlisted  the 

people's  confidence  by  a  selection  of  able  advisers.     This 

was  the  beginning  of  a  series  of  statesmen  chosen  from  the 

ranks  of  the  people.     He  found  England  in  dissension,  but 

transmitted  it  to  his  very  capable  son,  Henry  VIII,  a 

strong  and  well-organized  government.     After  twenty-five 

36 


National  Control  and  Industrial  Revolution    37 

years  of  rule,  "Henry,  head  of  the  state,  became  also  head 
of  the  church  or,  briefly,  the  English  pope."  Soon  after- 
ward came  the  "Virgin  Queen,"  Elizabeth,  who  was  a 
curious  compound  of  qualities  masculine  and  feminine. 
She  was  the  most  novel  statesman  known  to  history.  The 
ablest  statesmen  of  England  were  chosen  her  ministers, 
yet  she  was  clearer-brained  and  farther-sighted  than  any 
of  them.  Coquetry  was  her  diplomatic  weapon,  and  with 
it  the  winsome  queen  had  her  own  way. 

2.  Monopolies. — Queen  Elizabeth  (1558-1603)  appraised 
the  power  of  granting  patents  of  monopoly  to  her  favorites 
as  "the  fairest  flower  of  her  garden."  She  granted  exclu- 
sive rights  to  private  parties  to  deal  in  certain  articles  of 
common  use.  Competition  was  thereby  destroyed  and 
prices  fixed  by  the  privileged  few.  Such  necessities  as 
salt,  iron,  calfskins,  vinegar,  lead,  and  paper  were  con- 
trolled by  patentees.  Prices  became  exorbitant  and  the 
abuses  of  the  monopolists  intolerable. 

In  1 601  the  House  of  Commons  brought  pressure  to  bear 
on  the  Queen  and  she  promised  reform.  The  memorable 
Act  of  Parliament  of  1624  made  null  and  void  all  monopo- 
lies which  controlled  the  buying,  selling,  and  making  of 
goods  and  manufactures.  "This  act  effectually  secured 
the  freedom  of  industry  in  England;  and  in  the  opinion  of 
excellent  authorities  has  done  more  to  excite  the  spirit  of 
invention  and  industry  and  to  accelerate  the  progress  of 
riches  in  that  country  than  any  other  in  the  statute-book." 
The  historian  Gibbon  says:  "The  spirit  of  monopolists  is 
narrow,  lazy,  and  oppressive.  Their  work  is  more  costly 
and  less  productive  than  that  of  independent  artists,  and 
the  new  improvements,  so  eagerly  grasped  by  the  competi- 
tion of  freedom,  are  admitted  by  them  with  slow  and  sullen 


38  Introduction  to  Economics 

reluctance."  Restrictions  and  special  privileges  extended 
beyond  internal  affairs  and  applied  to  foreign  trade  as  well. 
These  industrial  changes  were  accompanied  by  changes  in 
economic  thought. 

3.  Mercantilism  or  Colbertism. — Colbert,  the  famous 
finance  minister  of  Louis  XIV  of  France,  had  an  idea  that 
money  is  the  greatest  index  of  national  wealth.  To  his 
mind  great  wealth  and  an  abundance  of  money  were  synon- 
ymous terms.  His  anxiety  to  enrich  France  led  him  to 
advocate  tariff  restrictions  such  as  would  cause  that  coun- 
try to  export  more  goods  than  she  imported,  and  to  collect 
"the  favorable  balance  of  trade"  in  money.  Many  states- 
men throughout  Europe  and  England  held  similar  views — 
these  statesmen,  not  economists,  are  called  Mercantilists. 

It  was  an  age  of  nation-building  and  of  international 
jealousies.  The  argument  that  great  sums  of  money  were 
required  to  maintain  foreign  fleets  and  armies  was  a  force- 
ful one.  Moreover,  money  was  considered  the  most  im- 
portant form  of  wealth,  because  of  its  durability  and  its 
exchangeability.  It  was  pointed  out  that  if  the  merchant 
does  not  convert  his  stock  into  money  he  fails,  and  from 
this  it  was  argued  that  the  nation  should  sell  its  goods  for 
money.  A  result  of  such  teachings  was  that  Spain,  Por- 
tugal, Scotland,  France,  and  England  forbade  the  exporta- 
tion of  gold.  We  cannot  emphasize  too  strongly  that  Mer- 
cantilism was  a  national  policy  rather  than  a  local  policy. 
Furthermore,  the  purpose  of  the  policy  was  to  create  a 
strong  national  state.  It  was  broader  than  money-mak- 
ing; it  was  state-making  under  severe  restrictions  and 
regulations.  These  restrictions  covered  trade,  manufactur- 
ing, agriculture,  and  labor — in  fact,  they  covered  all  of  the 
industrial  relationships  of  society.     The  false  doctrine  waf 


National  Control  and  Industrial  Revolution    89 

then  current  that  when  a  trade  is  made  one  party  must 
get  cheated.  Accordingly,  it  would  be  good  statesman- 
ship to  devise  a  system  that  would  cheat  foreigners  in 
trade,  and  make  collection  of  the  favorable  balance  in 
money. 

4.  Restrictions.  To  this  point  we  have  found  that  the 
history  of  industrial  England  was  characterized  by  restric- 
tions— restrictions  in  manor  life,  then  in  guild  life,  then  in 
all  trade  between  provinces;  and,  finally,  the  breakdown 
of  local  restrictions  and  the  rise  of  national  restrictions. 

5.  National  Ideals. — I  have  neglected  mention  of  impor- 
tant events  which  profoundly  influenced  the  economic  life 
of  England.  Nothing  has  been  said  of  the  awakened  enter- 
prise following  the  discovery  of  the  New  World.  No  ref- 
erence has  been  given  to  the  religious  wars  of  Europe, 
which  drove  so  many  skilled  artisans  to  England.  Nor 
has  mention  been  made  of  international  commercial  trea- 
ties, which  made  foreign  trade  safe,  large,  and  profitable. 
Not  least  of  the  omitted  items  was  the  formation  of  trad- 
ing companies,  such  as  the  famous  East  India  Company, 
which  carried  English  commerce  into  every  port,  and  in- 
troduced that  nation's  customs  and  flag  to  all  the  world. 

Our  purpose  has  been  not  to  detail  items,  however  inter- 
esting, except  as  they  might  show  how  economic  influ- 
ences give  form  to  new  ideas,  and  how  these  react,  giving 
form  to  new  lines  of  enterprise.  The  futility  of  attempt- 
ing to  study  economic  progress  apart  from  national  ideals 
may  be  seen  in  these  words  from  Professor  Kimball:1  "It 
is  to  be  especially  noted  that  national  ideals,  popular 
opinion,  or  some  similar  influence  has  always  greatly  influ- 
enced industrial  organization.     Thus,  in  India  the  caste 

1  Principles  of  Industrial  Organization,  p.  4. 


40  Introduction  to  Economics 

system  for  countless  years  prohibited  all  forms  of  factories 
and  all  production  was  by  simple  handicraft,  definite  kinds 
of  work  being  assigned  to  particular  classes  of  people. 
Under  the  Roman  system  the  armorers  or  fabri  were  a 
class  of  artisans  set  apart  for  this  sole  purpose,  and  they 
could  not  change  their  calling.  It  was  a  form  of  state- 
supported  and  regulated  slavery.  History  abounds  with 
similar  instances  of  the  effect  of  public  opinion  or  national 
necessity  upon  the  method  by  which  the  nation  was  pro- 
vided with  the  necessities  of  life.  While,  therefore,  the 
essential  features  of  our  modern  system  will  probably 
continue  indefinitely,  it  need  not  be  a  matter  of  surprise  or 
alarm  that  many  changes  and  regulations  have  been  made 
and  will  be  made  in  deference  to  public  opinion  or  national 
necessity." 

6.  The  Domestic  System. — Between  the  decay  of  the 
feudal  system  and  the  beginning  of  the  industrial  revolu- 
tion stands  the  domestic  system.  Domestic  is  defined  as 
belonging  to  the  house  or  home,  and,  in  keeping  with  this, 
the  simple  industries  of  that  time  were  not  housed  in  fac- 
tory buildings,  but  were  carried  on  around  the  family  fire- 
sides. This  system  began  at  a  time  when  farming  was 
the  primary  interest  of  the  householder.  But  he,  with  his 
family,  devoted  his  spare  time  to  some  simple  handicraft — 
particularly  spinning  and  weaving.  The  spinning-wheel, 
now  a  fit  antique  for  exhibition  in  a  museum,  was  found  in 
all  well-to-do  homes.  In  time  these  domestic  arts  took 
on  more  importance. 

A  master  workman,  employing  a  few  helpers  who  lived 
with  him,  carried  out  in  his  own  home  all  the  processes  of 
spinning,  weaving,  and  dyeing  cloth.  The  food  for  the 
workers  would  be  produced  upon  their  own  land,  that  is, 


National  Control  and  Industrial  Revolution    41 

they  did  farming  as  well  as  weaving.  Perhaps  a  farmer's 
wife  and  children  would  utilize  spare  time  in  weaving  cloth 
from  the  wool  of  their  own  sheep.  What  trade  there  was 
moved  in  a  very  limited  circle  because  of  the  poor  roads. 
Goods  were  produced  for  immediate  consumption,  the 
worker  knew  his  market  and  regulated  his  output  accord- 
ingly. There  was  a  close  personal  relation  between  maker 
and  consumer,  and  between  master  and  workman. 

7.  The  Industrial  Revolution. — There  was  virtue,  intel- 
ligence, and  a  certain  charm  in  the  simple  life  and  dignity 
of  manners  in  primitive  England.  The  customs  of  life 
and  the  household  appointments  of  that  people  were  al- 
most exactly  duplicated  in  many  sections  of  our  South 
prior  to  a  generation  ago.  In  many  an  isolated  community 
of  the  South  to-day  the  manipulation  of  the  hand-cards, 
spinning-wheel,  and  the  old-fashioned  loom  is  far  from 
being  a  lost  art.  There  is  an  economic  independence  and 
rude  comfort  which  these  people  get  from  direct  contact 
with  the  freshness  and  richness  of  the  virgin  soil. 

The  Industrial  Revolution  found  the  English  people  a 
brave  and  hardy  stock  who  loved  independence.  But  their 
primitive  methods  had  lingered  century  after  century,  with 
scarcely  any  evidence  of  private  thrift.  The  resulting  pov- 
erty and  stagnation  of  life  are  best  described  as  a  condition 
of  arrested  social  development.  Then  came  the  marvel- 
lous industrial  transformation.  The  change  was  like  the 
brightness  and  hope  of  day,  following  the  darkness  and 
dread  of  night. 

This  change, — we  call  it  the  Industrial  Revolution, — was 
a  change  from  the  home  to  the  factory,  from  hand-work 
to  machine-work,  from  rural  to  city  life,  from  local  to 
world  markets,  from  a  simple  to  a  complex  division  of 


4-2  Introduction  to  Economics 

labor.     But  greater  than  these  changes  and  the  cause  of 
them  was  a  change  in  the  point  of  view. 

8.  Commerce  and  Need  for  Machinery. — Prior  to  the 
fall  of  Xapoleon  (1815)  England  had  acquired  naval  su- 
premacy and  a  monopoly  of  commerce  on  the  sea.  This 
occasioned  an  extensive  demand  for  the  manufactured 
products  of  England,  especially  for  her  textiles.  Textiles 
were  produced  by  hand-cards,  the  spinning-wheel,  and  the 
old-fashioned  loom.  The  pieces  of  goods  were  collected 
from  the  hamlets  into  the  towns,  from  where  they  were 
hauled  over  all  but  impassible  roads  to  the  port  for  ship- 
ment. 

The  growing  demand  increased  the  pressure  on  old  proc- 
esses and  called  for  new  manufacturing  processes.  One 
weaver  could  use  the  product  of  six  spinners,  but  the  in- 
vention of  Kay's  drop-box  (1783)  enabled  one  weaver  to 
keep  ahead  of  ten  or  twelve  spinners.  Spinning  was  thus 
the  greatest  obstacle  to  progress,  and  the  Royal  Society 
offered  a  prize  for  an  invention  to  improve  spinning.  Im- 
provements followed  in  quick  succession,  and  large  ma- 
chinery succeeded  the  simple  tools  of  the  domestic  sys- 
tem. 

9.  The  Beginning  of  Industrial  Classes.— The  operating 
of  large  machinery  called  for  separate  buildings  in  which 
power  could  be  used.  Furthermore,  these  new  processes 
involved  too  great  an  expense  for  the  small  master  to  incur, 
so  we  find  the  capitalist  buying  machines  and  employing 
labor.  The  consequence  was  an  employing  class,  sepa- 
rated from  the  workers  and  having  no  share  in  the  actual 
labor,  but  furnishing  the  means  of  production  and  paying 
men  to  use  these  means.  Naturally  these  new  machines 
were  installed  where  power  was  available,  and  the  popu- 


National  Control  and  Industrial  Revolution    43 

lation  concentrated  in  factory  districts  along  the  swiftly 
running  streams  of  northern  England. 

When  James  Watt  perfected  the  steam-engine,  the  power 
of  steam  was  applied  and  factories  multiplied  still  more 
rapidly.  Improved  methods  of  smelting  iron  by  the  use 
of  coal  were  discovered  and  the  mining  industries  grew. 
Canals  and  roads  were  improved,  then  railroads  were 
built,  so  that  within  two  generations  England  was  trans- 
formed into  a  region  of  thickly  populated  factory  towns 
closely  connected  by  railroads. 

10.  Scientific  Farming. — To  hasten  still  more  the  changes 
a  revolution  in  agricultural  methods  occurred  at  the  same 
time.  Scientific  farming  was  introduced  and  farmers  began 
to  employ  new  methods  of  tilling  the  soil  and  new  means 
of  fertilizing.  Such  systems  could  be  used  only  by  the 
prosperous  and  the  small  farmer  was  forced  out.  He  either 
drifted  to  the  city  to  join  the  ranks  of  the  factory- workers, 
or  sank  to  the  level  of  an  agricultural  day-laborer. 

ii.  Control  of  Natural  Forces. — Prior  to  the  use  of  large 
machinery  the  output  of  industry  was  limited  by  the  fund 
of  human  muscle  and  nervous  energy.  Then  came  the 
large  machine — a  device  by  means  of  which  human  intelli- 
gence takes  control  over  natural  forces.  The  limit  to  the 
output  of  industry  was  no  longer  fixed  by  the  fund  of  mus- 
cular power;  it  was  determined  by  the  fund  of  knowledge. 
Knowledge  gives  form  to  machinery  winch,  in  turn,  ren- 
ders natural  forces  subservient  to  human  will.  Expressed 
differently:  the  limit  to  the  output  of  an  industry  based 
upon  machinery  is  the  available  power  of  nature. 

To  labor-saving  machinery  two  meanings  are  attached: 
it  substitutes  for  labor,  and  does  the  work  formerly  done 
by  hand;  it  does  heavy  work  of  which  human  muscle  is 


44  Introduction  to  Economics 

incapable.  The  substitution  of  machine-power  for  hand- 
work had  its  beginning  at  the  middle  of  the  eighteenth 
century. 

The  beginning  of  the  great  inventions  is  a  date  singled 
out  for  distinct  emphasis  in  the  history  of  human  progress, 
but  greater  than  these  inventions  was  the  change  in  the 
course  of  ideas  which  called  them  into  existence.  We 
must  not  confuse  cause  and  effect:  great  inventions  did  not 
cause  the  Industrial  Revolution,  but  it  was  the  Revolution 
that  caused  the  great  inventions. 

12.  The  Long  Delay. — In  our  day  long-distance  conver- 
sation by  wire,  the  cabling  of  news  back  and  forth  across 
the  seas,  the  wireless  telegraph,  swiftly  sailing  steamers, 
skyscrapers  and  subways,  great  manufactories  covering 
acres  of  ground  and  utilizing  powerful  machinery  and  em- 
ploying thousands  of  men — these  have  become  common- 
place. This  is  a  period  of  restless  search  for  the  novel  and 
new.  The  captain  of  industry,  even  though  a  millionaire, 
sleeps  upon  a  most  restless  pillow;  he  is  thinking,  concoct- 
ing, scheming,  and  devising  how  to  add  to  his  wherewithal. 
Progress  is  contagious  and  comes  to  affect  the  whole  peo- 
ple. It  is  with  nations  as  with  individuals,  the  more  they 
progress  the  more  restless  they  become. 

From  this  progressive  age  we  look  back  with  amazement 
and  wonder  upon  the  non-progressive  and  poor  yet  con- 
tented peoples  of  the  domestic  system.  How  could  man- 
kind have  dwelt  upon  the  earth  in  a  civilized  state  so  long 
and  yet  have  made  such  a  very  small  advance  in  industrial 
methods?  As  H.  C.  Adams  puts  it:  "Penelope,  who 
worked  at  her  loom  while  awaiting  the  return  of  Ulysses, 
would  have  found  nothing  very  strange  in  the  art  of  weav- 
ing, could  she  have  made  a  visit  to  the  home  of  a  textile 
worker  in  the  beginning  of  the  reign  of  George  III. "     Truly, 


National  Control  and  Industrial  Revolution    45 

the  greatest  wonder  regarding  the  Industrial  Revolution 
was  its  long  delay. 

13.  Changed  Point  of  View. — The  significant  change  in 
ideas  was  simply  this:  The  idea  that  machinery  would 
substitute  for  muscular  strain  and  multiply  the  output  of 
industry  did  not  appeal  to  the  imagination  of  man  before 
the  Revolution;  then  an  economic  new  birth  came  about 
because  of  the  large  European  demand  for  English  textiles. 
Hand-methods  could  not  exploit  the  new  opportunities; 
machinery  must  be  had.  England  awoke;  she  offered 
prizes  of  £50  and  £25  (large  prizes  for  that  time),  respec- 
tively, for  the  first  and  next  best  improved  method  of 
spinning.  The  incentive  was  great  and  following  it  were 
the  "Four  Great  Inventions"  (Hargreaves's  spinning-jenny, 
1770;  Arkwright's  water-frame,  1781;  Crompton's  mule, 
1779;  Cartwright's  power-loom,  1785).  By  the  end  of  the 
first  quarter  of  the  last  century  the  old  idea  had  completely 
given  way  to  the  new.  There  was  full  appreciation  of  in- 
ventions and  inventive  genius  was  generously  encouraged. 
The  industrial  greatness  of  to-day  owes  its  being  to  this 
change  in  the  idea  regarding  the  use  of  machinery. 

14.  Social  Changes. — One  of  the  greatest  effects  of  this 
sudden  Industrial  Revolution  was  the  degeneration  of  the 
old  skilled  laborers  and  the  employment  of  a  new  class — 
women  and  children.  Manufacturers  found  that  the  new 
machines  performed  the  work  of  skilled  labor,  and  that 
in  many  cases  a  woman  or  a  child  could  operate  them  effec- 
tively. Women  and  children  were  ruthlessly  exploited, 
laboring  fourteen  and  sixteen  hours  a  day  for  a  mere  sub- 
sistence. Factories  and  factory  towns  sprang  up  quickly 
and  were  built  with  little  regard  for  the  health  or  morals 
of  laborers. 

Previous  to  the  Industrial  Revolution  the  country  as  a 


4(i  Introduction  to  Economics 

whole  was  poor;  yet  the  wealth  was  fairly  well  distributed, 
thus  securing  general  comfort.  The  new  forms  of  industry 
were  highly  productive,  but  they  brought  about  extreme 
poverty  in  the  midst  of  abundance.  From  1760  to  18 18 
the  population  had  increased  70  per  cent,  and  the  cost  of 
poor  relief  had  increased  530  per  cent.  The  degeneration 
of  labor,  the  alienation  of  classes,  the  increase  of  wealth 
and  the  multiplication  of  paupers  were  characteristic  of 

this  period. 

Fierce  competition  in  these  new  industries  caused  manu- 
facturers to  disregard  the  protection  of  morals,  health,  and 
even  the  lives  of  workers.  The  goal  was  high  profits,  and 
every  effort  on  the  part  of  public-spirited  people  for  reform 
was  met  with  opposition.  The  prevailing  spirit  of  indi- 
vidual liberty  which  characterized  that  period  made  it 
very  difficult  to  enact  much-needed  legislation  to  remedy 
the  wretched  conditions  of  workers.  This  new  theory  is 
so  different  from  the  Mercantile  doctrine  previously  men- 
tioned that  a  brief  explanation  of  it  is  necessary. 

15.  The  Physiocrats. — It  will  be  recalled  that  in  the  sev- 
enteenth century  the  governments  of  Europe  had  imposed 
severe  restrictive  systems  upon  trade  and  other  industrial 
activities.  Such  severity  produced  reaction,  which  was 
first  expressed  in  France  in  the  early  eighteenth  century 
by  a  school  of  economists  known  as  the  "Physiocrats." 
They  believed  in  a  system  of  "natural  liberty,"  i.  e.,  that 
the  right  to  work  is  the  property  of  every  man,  and  that 
he  should  be  permitted  to  sell  this  property  to  the  best 
possible  advantage,  with  no  regulation  from  his  govern- 
ment except  the  necessary  protection.  The  thought  was 
that  individuals  are  by  nature  endowed  with  different  ca- 
pacities, and  that  each  can  produce  the  greatest  abundance 


National  Control  and  Industrial  Revolution     47 

if  he  follow  the  course  for  which  his  particular  type  of 
natural  strength  capacitates  him.  Moreover,  nature  fur- 
nishes him  the  inclination  to  follow  his  particular  bent  or 
talent.  The  Physiocrats  urged,  therefore,  the  removal  of 
restriction  in  order  that  nature  might  take  her  course. 
Each  will  employ  his  talent  most  effectively  and  thereby 
produce  most  for  himself.  They  concluded  that  because 
society  is  composed  of  individuals  the  system  which  is 
best  for  individuals  must  be  best  for  all.  When  the  pro- 
duction of  each  is  greatest,  the  total  for  all  must  be  largest. 

16.  The  Freedom  of  Trade  and  Agriculture. — Naturally 
the  Physiocrats  were  advocates  of  the  freedom  of  trade. 
They  fought  against  the  restrictions  upon  imports  and 
exports  that  had  been  placed  by  the  Mercantilists. 

They  rendered  another  service  to  economic  policy  in  dis- 
couraging the  overemphasis  placed  upon  gold  and  silver 
by  the  mercantilists.  Agriculture  was  believed  by  them 
to  be  the  only  real  productive  industry,  and  they  wished  to 
foster  it.  To  their  way  of  thinking,  the  freedom  of  trade 
would  make  for  the  greatest  encouragement  to  agriculture. 
Were  trade  free,  different  sections  of  country  could  be 
given  up  to  those  products  for  which  nature  had  most 
highly  capacitated  them.  While  it  is  far  from  being  true 
that  agriculture  is  the  only  real  productive  occupation,  yet 
this  doctrine  served  an  excellent  purpose  because  it  enabled 
statesmen  to  see  that  a  mere  accumulation  of  money  is 
not  the  secret  of  national  strength. 

17.  Political  Effects. — Our  chief  interest  in  the  Physio- 
crats, however,  is  in  the  political  effects  of  their  teachings. 
If  governments  followed  their  laissez-faire  (let-us-alone) 
policy,  there  would  be  no  regulations  upon  conditions  of 
labor.     Naturally  the  manufacturers  wished  to  be  left  free 


48  Introduction  to  Economics 

to  reap  all  possible  benefits  from  the  new  industrial  condi- 
tions, so  they  championed  ardently  this  theory.  The  pub- 
lication of  Adam  Smith's  Wealth  of  Nations  in  1776  ex- 
pressed for  Englishmen  a  modified  version  of  some  of  these 
physiocratic  views.  Public  men  became  imbued  with  this 
theory  of  natural  liberty.  So  closely  was  this  doctrine  of 
laissez-faire  associated  with  the  manufacturers  of  Eng- 
land that  the  policy  is  sometimes  termed  the  "Manchester 
Doctrine,"  after  the  manufacturing  city  of  that  name.  In 
keeping  with  these  theories,  the  moral  and  physical  condi- 
tions of  mine  and  factory  workers  became  intolerable. 
Public  sympathy  was  aroused  and  Parliament  after  a  de- 
plorable delay  was  forced  to  pass  laws,  if  only  to  protect 
human  life.  Then  it  was  that  "social  legislation"  began. 
Governments  entered  upon  a  new  policy  of  regulation  of 
industry  for  the  interest  of  the  public — a  policy  that  has 
grown  steadily  since. 

18.  Beginning  of  Social  Legislation. — The  workingmen 
themselves  were  forced  to  combine  for  protection,  and  their 
trades-unions  began  to  be  felt  as  a  political  factor.  As  a 
result  of  the  movement  of  the  population  from  the  coun- 
try to  the  city,  a  reapportionment  of  the  representatives 
in  Parliament  had  taken  place,  and  this  new  laboring  class 
was  given  a  voice  in  legislation.  As  they  became  stronger 
they  forced  new  measures  through,  until  to-day  England 
has  "Labor"  members  in  the  cabinet,  laws  regulating 
workingmen's  compensation  for  accidents,  compulsory  in- 
surance measures,  old-age  pensions,  restrictions  upon  the 
work  of  women  and  children,  and  a  whole  mass  of  similar 
"social  legislation." 

19.  A  Summary  of  Changes  Which  Affected  Wage- 
Earners. — Prior  to  the  introduction  of  machinery,  wt  have 


National  Control  and  Industrial  Revolution    49 

seen  that  the  hired  man  worked  in  the  home  of  the  em- 
ployer. The  simple  and  inexpensive  tools  were  owned 
oftentimes  by  the  laborer  himself.  There  was  no  sharp 
distinction  between  capitalist  and  laborer.  But  the  im- 
mediate result  of  large  machinery  was  the  distinct  separa- 
tion of  one  class  from  the  other. 

Much  capital  was  required  to  install  the  new  machinery, 
which  was  large  and  expensive.  The  ownership  of  the 
means  of  production  became  concentrated  in  the  hands 
of  capitalists.  Separate  buildings  were  required  to  house 
the  machinery — thus  distinct  factories  arose. 

To  operate  these  factories  many  laborers  were  required 
— thus  arose  congregated  labor.  Large  machinery  had 
the  effect  of  a  wedge  driven  into  the  side  of  industrial 
society.  It  separated  capitalists  from  laborers,  and  this 
cleavage  brought  about  two  groups  with  unlike  inter- 
ests. 

Losing  the  sympathy  that  comes  from  personal  contact 
with  hired  men,  employers  bought  labor  as  a  mere  ware. 
The  friendly  relations  and  mutual  understanding  between 
worker  and  employer  came  to  an  end.  Stockholders  in- 
trusted the  direction  of  their  factories  to  a  paid  manager 
whose  sole  interest  was  to  make  a  good  showing  in  divi- 
dends for  his  employers.  He  forced  the  lowest  wage  that 
was  possible,  believing  that  every  penny  subtracted  from 
wages  was  a  penny  added  to  dividends.  Employers  were 
few  in  number  and  could  easily  form  an  understanding  to 
suppress  competition  on  their  side.  This  organized  op- 
pression of  the  capitalist  class  caused  a  reaction  and  the 
formation  of  unions  among  the  laborers. 

20.  The  Formation  of  Labor-Unions. — The  separation  of 
laborers  from  capitalists  gave  rise  to  misunderstandings, 


50  Introduction  to  Economics 

and  each  class  looked  upon  the  other  as  an  opportunity  to 
be  exploited.  Laborers  had  a  common  purpose  in  oppos- 
ing capitalists  and  a  common  interest  in  the  betterment 
of  their  own  conditions.  This  oneness  of  purpose  and 
interest  made  the  formation  of  labor-unions  inevitable. 
The  purpose  of  unions  was  to  improve  laborers,  to  improve 
their  wages,  and  to  improve  their  environment. 

Wages  they  would  improve  either  by  getting  more  per 
day,  or  by  getting  the  same  for  a  shorter  day.  Wages  are 
raised  when  the  pay  for  an  eight-hour  day  is  increased 
from  $2  to  $3.  So  also  are  wages  improved  if  the  pay  re- 
mains $2  per  day,  while  the  working  hours  are  shortened 
from  eight  to  six;  the  increase  is  from  25  to  33^2  cents  an 
hour. 

So  long  as  laborers  were  unorganized,  however,  there 
was  little  opportunity  to  improve  wages.  The  individual 
laborer  whose  daily  bread  was  from  his  daily  labor  could 
not  bargain  upon  equal  terms  with  the  combined  forces  of 
capital.  Collective  bargaining  means  that  labor  is  banded 
together  in  agreement  to  bargain  for  wages  in  a  body. 
Throughout  the  history  of  labor-unions,  collective  bargain- 
ing has  been  the  chief  weapon  to  enfoice  their  demands  for 
a  higher  wage.  The  extent  to  which  unions  may  increase 
wages  will  be  a  topic  for  special  consideration  later  on. 

An  object  of  unions  has  been,  and  will  continue  to  be, 
to  improve  the  environment  of  labor.  Sanitary  conditions, 
pure  drinking-water,  proper  light,  heat,  and  ventilation, 
rest-rooms,  etc.,  are  topics  which  unions  discuss,  bring  to 
public  attention,  and  upon  which  they  have  enforced  and 
will  continue  to  enforce  action.  Unions,  moreover,  pro- 
vide different  forms  of  insurance  and  pensions  for  their 
members.     The  rise  of  labor-unions  and  their  later  devel- 


National  Control  and  Industrial  Revolution    51 

opment  into  trades-unions  form  one  of  the  most  far-reach- 
ing results  of  the  Industrial  Revolution. 

21.  Exercises. — i.  What  movement  in  England  made  it 
possible  for  Queen  Elizabeth  to  grant  monopolies  which 
were  national  in  scope?  How  did  the  method  of  obtaining 
a  monopoly  in  her  time  differ  from  the  obtaining  of  one 
to-day  ? 

2.  What  was  the  domestic  system? 

3.  Was  labor  unionized  during  the  domestic  system? 
Give  the  reason  for  your  answer. 

4.  Why  do  the  accounts  of  the  beginning  of  the  indus- 
trial Revolution  make  so  much  mention  of  the  textiles? 

5.  J.  D.  Forrest  says:  "The  industrial  revolution  was 
not  the  result  of  the  great  mechanical  inventions:  rather 
the  inventions  were  the  result  of  the  revolution."  C.  J. 
Bullock  says:  "Between  1760  and  1840  English  industries 
were  revolutionized.  The  cause  of  this  was  a  remarkable 
series  of  inventions  which  affected  the  cotton  and  woollen 
industries  first."  With  which  of  these  statements  is  the 
present  chapter  in  accord?  Write  a  brief  argument  to 
substantiate  one  of  these  statements  and  to  disprove  the 
other. 

6.  What  was  the  central  idea  in  the  teaching  of  the 
Physiocrats  ? 

7.  Define  laissez-faire.  What  effect  did  the  application 
of  this  doctrine  have  upon  the  conditions  of  the  laboring 
population  in  England? 

8.  Is  the  tendency  toward  a  greater  or  less  application 
of  the  laissez-faire  doctrine?  In  answer  to  this  question 
make  mention  of  important  laws  which  have  been  enacted 
regarding  the  tariff,  pure  food  and  drugs,  the  working  con- 
ditions of  women  and  children,  railroad  rates,  and  safety- 
appliance  for  machinery. 

9.  What  conditions  brought  about  the  formation  of 
labor-unions  ? 

10.  Summarize  the  chief  objects  which  unions  would 
accomplish. 


52  Introduction  to  Economics 

ii.  Criticisms  of  Mercantilism.— -These  criticisms  were 
offered  by  writers  contemporary  with  the  Mercantilists. 
It  will  be  a  helpful  exercise  if  the  student  will  give  argu- 
ments in  defense  of,  or  against  them. 

(a)  If  raw  materials  are  wanting,  the  factory  must  stop; 
if  food  is  wanting  the  people  must  starve;  if  gold  is  want- 
ing, there  may  be  substituted  barter  or  credit  or  paper 
money,  therefore  money  is  secondary  in  importance. 

(b)  Money  runs  after  goods,  but  goods  do  not  always 
run  after  money.  Goods  serve  many  purposes  besides 
buying  money,  but  money  serves  no  other  purpose  than 
to  buy  goods.  Other  things  may  do  the  work  of  money, 
but  money  does  not  do  the  work  of  other  things.  There- 
fore, money  is  not  real  wealth. 

(c)  We  exchange  durable  iron  for  wine  in  France.  Why 
not  keep  iron  and  thus  multiply  durable  pots  and  pans? 
Because  we  would  soon  have  more  than  is  needed.  This, 
it  is  evident,  would  be  wasteful.  (This  is  intended  to 
show  that  it  is  absurd  for  a  nation  to  accumulate  more 
gold  than  necessary  simply  because  it  is  durable.) 

(d)  Foreign  armies  may  be  maintained  by  sending  man- 
ufactured goods  or  raw  materials,  as  well  as  by  sending 
money,  so  money  is  not  necessary  for  foreign  wars. 

(e)  The  benefit  of  foreign  trade  consists,  not  in  a  money 
balance,  but  in  trading  surplus  products  for  needed  goods. 

(/)  Every  seller  must  be  a  purchaser  and  every  purchaser 
a  seller,  therefore  England  must  accept  goods  in  exchange 
if  she  continues  to  trade. 

(g)  When  two  parties  trade,  one  does  not  necessarily  get 
cheated.  Exchange  profits  both  parties:  the  interest  is 
one  of  man  with  man,  of  state  with  state  in  the  same  realm, 
of  nation  with  nation. 

(h)  To  nature  and  not  to  man  belongs  the  police  of  the 
economic  order;  therefore  all  restrictions  on  trade  should 
be  removed. 

(i)  The  nation  which  places  a  tariff  against  foreign 
Powers  will  be  retaliated  against  by  those  Powers. 

{])  A  merchant  may  grow  rich  by  accumulating  money 


National  Control  and  Industrial  Revolution     53 

because  he  can  exchange  his  money  for  the  products  of 
others;  the  case  is  different  with  a  nation,  for  in  the  long 
run  a  nation  must  depend  upon  itself  for  its  necessities  of 
life. 

(k)  A  nation  cannot  accumulate  money  at  the  expense 
of  others,  because  prices  increase  in  the  nation  with  a 
large  amount  of  money  and  decrease  in  the  countries  where 
money  is  scarce.  This  causes  a  flow  of  money  away  from 
the  country  which  has  a  large  store  of  gold,  thus  equalizing 
the  money  supply  as  between  nations. 


CHAPTER   IV 
THE  PRESENT  ECONOMIC  ORDER 

i.  Introduction.  2.  Economic  laws.  3.  Theory.  4.  The  present  eco- 
nomic order.  5.  Private  property.  6.  Social  expediency.  7.  The  revival 
of  enclosures.  8.  Transportation.  9.  The  industrial  development  of  this 
country.  10.  The  growth  of  cities.  11.  An  example  from  statistics.  12. 
The  geographic  division  of  labor.  13.  The  division  of  labor  and  mutual 
dependence  in  the  factory  system.  14.  Differentiation.  15.  Trading. 
16.  Competition.  17.  The  extent  of  competition.  18.  Self-interest.  19. 
Economic  classes.  20.  Contracts.  21.  The  automatic  regulation  of  indus- 
try.    22.  Exercises. 

i.  Introduction. — The  preceding  chapters  offer  a  brief 
survey  of  essential  movements  preceding  the  present  eco- 
nomic order.  The  purpose  of  this  chapter  is  to  review 
some  of  the  characteristic  institutions  under  which  eco- 
nomic laws  are  now  operating. 

In  a  narrow  sense  economics  is  the  science  of  which 
business  is  the  art.  Business  as  here  used  signifies  any 
occupation,  employment,  or  investment  for  the  sake  of 
income.  A  science  teaches  us  to  know,  an  art  to  do;  a 
science  logically  precedes  the  creation  of  a  corresponding 
useful  art.  The  science  of  anatomy  precedes  the  art  of 
surgery;  the  science  of  astronomy  precedes  the  art  of  navi- 
gation; the  science  of  economics  precedes  the  art  of  busi- 
ness. Economic  science  is  the  only  true  guide  of  indus- 
trial procedure;  it  contains  the  premises  of  reasoning  on 
business  affairs. 

2.  Economic  laws  are  statements  of  the  order  or  rela- 
tionship of  business  phenomena.  They  affirm  that  if  cer- 
tain causes  exist,  certain  effects  follow.     The  true  order 

54 


The  Present  Economic  Order  55 

or  causal  relationship  of  things  exists  long  before  it  is  ascer- 
tained. Newton  did  not  make  the  fact  of  gravitation;  he 
found  it,  and  his  formulation  of  this  fact  is  a  law.  Little 
more  than  a  century  ago  the  economists  stumbled  upon 
the  law  of  diminishing  returns.  From  earliest  times  the 
forces  which  limit  production  had  been  in  operation,  had 
scattered  people  over  the  earth,  and  had  limited  their 
supplies  for  the  necessities  of  life,  but  only  in  recent  times 
have  these  forces  been  formulated  into  a  law.  As  the 
nugget  is  not  converted  into  gold  because  we  find  it,  so  an 
economic  relationship  is  not  transformed  into  a  law  be- 
cause we  discover  it;  we  are  not  permitted  to  speak  of  a 
statement  as  a  law  until  patient  testing  proves  it  worthy 
of  that  title.  This  science  is  constantly  being  enlarged 
through  the  discovery  of  relationships  and  the  formula- 
tion of  new  laws  and  by  increasing  our  knowledge  of  their 
scope. 

An  economic  law  states  that  certain  causes  produce 
certain  effects  only  under  certain  conditions.  Reasoning 
goes  astray  when  counteracting  influences  are  not  consid- 
ered along  with  positive  influences.  The  law  of  gravita- 
tion does  not  teach  that  a  stone  does  fall  toward  the  cen- 
tre of  the  earth;  it  teaches  that  a  stone  would  so  fall  were 
counteracting  influences  removed.  It  is  a  law  of  popula- 
tion that  the  number  of  people  tend  to  increase  more  rap- 
idly than  does  the  supply  of  food.  The  authors  of  a  cen- 
tury ago  were  extremely  pessimistic  because,  in  their  judg- 
ment, starvation,  disease,  and  death  were  the  dismal 
results  deduced  from  this  law.  The  error  in  their  reason- 
ing is  that  they  too  lightly  regarded  the  counteracting 
forces  or  checks  to  population. 

Economic  laws  are  either  of  coexistence  or  of  sequence. 


56  Introduction  to  Economics 

It  is  a  law  of  coexistem  e  thai  like  goods  in  the  same  mar- 
ket a1  the  same  time  sell  a1  the  same  price.  It  is  a  law  of 
sequence  that  by  adding  unit  after  unit  to  a  supply  of 
like  goods  in  a  market,  the  price,  other  things  equal,  is 
lowered. 

3.  Theory. — It  is  a  commonplace  though  erroneous  re- 
mark that  something  is  well  enough  in  theory,  but  that  it 
will  not  work  in  practice.  It  is  an  error  to  contrast  theory 
and  practice  as  the  impractical  versus  the  practical.  A 
theory  is  a  provisional  or  tentative  formulation  of  a  law. 
That  which  is  true  in  theory  must  be  true  in  practice.  It 
takes  investigation  and  sound  reasoning  to  formulate  a 
true  theory  because  it  must  fit  the  facts.  Theory  and 
science  cannot  I>c  divorced,  for  theory  explains  phenomena. 
Theory  and  practice  hold  the  relationship  of  explanation 
and  execution. 

4.  The  present  economic  order  embraces  the  conditions 
under  which  economic  laws  are  formulated.  Significant 
institutions  of  this  order  now  to  be  discussed  are:  Private 
property,  division  of  labor,  exchange,  competition,  eco- 
nomic classes,  and  contracts. 

5.  Private  property  is  the  fundamental  institution  in 
the  ] (resent  economic  order.  It  has  been  defended  upon 
the  following  bases: 

(a)  Private  property  has  been  justified  on  the  ground 
of  occupancy.  It  would  be  accurate  to  speak  of  occu- 
pancy as  the  cause,  in  many  cases,  of  private  property. 
Bui  occupancy  can  never  with  accuracy  be  given  as  a  jus- 
tification of  the  institution. 

(b)  Private  property  has  been  justified  by  the  so-called 
natural-rights  theory.  It  is  argued  that  property  is  neces- 
sary for  the  full  self-realization  of  the  individual.    But, 


The  Present  Economic  Order  57 

in  fact,  is  this  not  a  condemnation  of  private  property? 
The  institution  of  private  property  leaves  the  many  all 
but  propertyless,  whereas  common  ownership  would  dis- 
tribute among  all  the  means  of  self-development.  Again, 
what  things  redound  to  our  fullest  self-realization?  Our 
answer  to  this  is  not  the  same  as  it  was  a  century  ago; 
ideas  continually  change  as  to  what  is  right.  Socrates 
defended  slavery  on  the  basis  of  natural  rights.  We  can- 
not justify  private  property  as  a  natural  right  or  as  a 
means  to  the  end  of  the  most  complete  self-realization 
until  we  know  precisely  what  such  means  are. 

(c)  Private  property  has  been  justified  by  the  labor 
theory,  namely  that  what  a  person  creates  by  his  muscle 
or  brain  is  his.  A  person  has  a  right  to  himself,  hence  the 
right  to  the  use  of  his  body  and  mind  to  acquire  the  means 
of  self-preservation.  This  implies  the  right  to  own  and 
enjoy  the  products  of  his  labor.  But  this  does  not  justify 
the  private  ownership  of  land  and  other  resources  which 
are  not  the  products  of  labor.  It  cannot,  therefore,  be 
given  as  a  justification  or  basis  for  the  institution  of  pri- 
vate property.  It  is  upon  this  ground  largely  that  the 
great  single-tax  advocate,  Henry  George,  denied  the  right 
of  private  property  in  land. 

(d)  Private  property  has  been  justified  by  the  legal 
theory.  This,  however,  is  a  truism  and  not  a  theory. 
Whatever  the  law  recognizes  as  private  property  is  such. 
The  law  simply  states  that  this  or  that  may  be  privately 
owned  and  there  the  matter  ends. 

6.  Social  Expediency. — The  theories  above  mentioned 
fail  to  justify  private  property.  The  acquisition  of  pri- 
vate property  in  early  times  was  by  methods  which  would 
not  meet  with  public  sanction  in  our  day.     The  standards 


58  Introduction  to  Economics 

of  business  ethics  and  the  problems  of  ancient  times  dif- 
fered from  those  we  now  know.  Private  property  to-day 
rests  upon  the  one  ground  of  social  expediency.  If  it 
works  best,  if  it  insures  the  greatest  good  to  the  greatest 
number,  it  is  justified.  It  is  a  human  institution  which  is 
always  undergoing  modification  and  change.  Under  it 
some  suffer  misery  while  others  enjoy  the  comforts  of  the 
idle  rich.  Its  workings  are  imperfect,  as  are  those  of  all 
human  institutions.  Despite  inequalities,  however,  it 
seems  to  stand  the  test  of  the  greatest  good.  Another  ex- 
ample from  the  industrial  history  of  England  will  illumi- 
nate this  point. 

7.  The  Revival  of  Enclosures.— During  the  years  from 
1760  to  1819  as  many  as  6,331,800  acres  of  land  were  en- 
closed in  England.  England  had  formerly  secured  large 
supplies  of  raw  materials  from  Europe,  but  during  the 
Napoleonic  Wars  this  market  was  cut  off,  so  she  had  to 
depend  upon  her  own  soil.  This  change  was  burdensome 
because  the  tillable  soil  was  limited  and  there  was  a  dense 
population.  In  the  preceding  chapter  we  mentioned  a 
large  export  demand  for  English  products;  add  to  this  a 
large  home  demand  and  it  is  at  once  evident  that  prices 
for  the  products  of  the  land  must  rise.  The  high  prices  of 
products  caused  a  rise  in  the  price  of  land  and  its  rent. 
High  land  prices  in  turn  excited  a  wish  on  the  part  of  indi- 
viduals to  enclose  and  possess  land.  The  government 
looked  with  favor  upon  the  move,  because  the  cultivation 
of  the  commons  had  been  both  wasteful  and  crude.  It 
was  thought  that  the  incentive  of  private  property  would 
largely  augment  production,  and  that  under  private  owner- 
ship capital  would  be  invested  in  agriculture  and  land 
would  be  improved. 


The  Present  Economic  Order  59 

One  keeps  no  grudging  account  of  capital  and  exertion 
which  he  spends  upon  his  own  soil.  He  is  early  in  the 
field;  for  each  extra  seed  planted  and  every  additional 
waste  avoided  means  more  wealth  which  he  and  his  family 
may  enjoy.  One  comes  to  personify  and  to  love  his  own 
land,  shrubs,  trees,  and  cattle.  Arthur  Young,  a  writer 
on  agricultural  topics,  now  over  a  century  ago,  said:  "Give 
a  man  secure  possession  of  a  bleak  rock  and  he  will  con- 
vert it  into  a  garden."  To  this  statement  the  great  Ameri- 
can economist  F.  A.  Walker  added:  "The  vineyards  of 
the  Rhine,  built  up  in  many  cases  of  earth  brought  in 
baskets  up  the  sides  of  the  mountains,  are  speaking  wit- 
nesses to  the  truth  of  this  statement;  while  many  of  the 
richest  fields  of  Holland  and  Belgium,  once  drifting  wastes, 
illustrate  the  other  saying  of  the  eminent  traveller:  'The 
magic  of  property  turns  sand  into  gold.'"  Private  prop- 
erty, so  far  as  we  know,  is  the  greatest  incentive  to  thrift. 

No  spirited  activity  had  attended  labor  on  the  com- 
mons; on  the  contrary,  sloth  and  indolence,  land-butchery 
and  small  crops  were  always  apparent.  None  the  less, 
enclosures  were  unpopular  with  the  poor,  who  would  pas- 
ture their  stock  and  husband  a  meagre  subsistence  upon 
the  commons.     A  popular  piece  of  doggerel  declared  that: 

"The  law  locks  up  the  man  or  woman 
Who  steals  the  goose  from  off  the  common; 
But  leaves  the  greater  villain  loose 
Who  steals  the  common  from  the  goose." 

It  is  the  testimony  of  Jeremy  Bentham  (1748-183 2), 
an  eminent  thinker  and  writer  of  that  time,  that,  after 
the  enclosures,  "in  passing  through  the  lands  which  have 
undergone  that  happy  change,  we  are  enchanted  as  by  the 


60  Introduction  to  Economics 

sight  of  a  new  colony.  Harvests,  flocks,  smiling  habita- 
tions, have  succeeded  to  the  dull  sterility  of  a  desert. 
Happy  conquests  of  peaceful  industry."  The  evidence 
which  one  gains  from  the  literature  of  that  time  goes  to 
show  that,  in  spite  of  the  apparent  hardships  worked  by 
converting  public  lands  into  private  property,  the  greater 
social  good  was  served  because  the  land  was  made  more 
productive.  It  was  upon  the  ground  of  social  expediency 
that  enclosures  were  defended,  and  it  is  upon  that  ground 
that  we  justify  private  property  to-day. 

The  extent  and  limitations  of  private  property  will  be 
considered  in  a  later  chapter.  Enough  has  been  said  to 
indicate  that  this  institution  has  been  of  slow  growth, 
that  it  is  subject  to  change  with  varying  social  needs,  and 
that  it  is  the  foundation-stone  of  the  present  economic 
order. 

8.  Transportation. — The  economic  order  of  to-day  is 
new  to  the  world.  A  chief  factor  in  determining  the  in- 
dustrial life  of  our  time  is  that  of  transportation  facilities. 

Picture  a  family  in  a  self-sufficing  community.  It  must 
practise  a  slow,  wasteful,  and  chaotic  means  of  getting  a 
living.  Poverty,  indigence,  and  ignorance  invariably  at- 
tend such  conditions.  The  cause  of  self-sufficiency  is  a 
want  of  transportation  facilities  or  of  means  of  contact 
with  the  outside  world. 

Given  transportation,  however,  the  products  of  different 
communities  may  be  exchanged  for  one  another.  Trans- 
portation makes  this  exchange  possible.  When  it  becomes 
easy  for  localities  to  trade  with  one  another,  it  becomes 
wise  for  the  different  communities  to  turn  their  productive 
effort  to  the  output  of  goods  for  which  they  have  compara- 
tive  advantages  in  production.     If  nature   favors   com- 


The  Present  Economic  Order  61 

munity  A  for  the  growing  of  tobacco,  and  B  for  the  manu- 
facturing of  shoes,  and  C  for  the  growing  of  oysters,  it 
will  follow  that  each  locality  can  outcompete  all  the  others 
in  a  certain  line,  and  those  industries  will  localize  with 
respect  to  the  maximum  gain. 

This  localization  of  industries  in  turn  leads  to  concen- 
tration of  capital.  Capital  in  the  different  industries  will 
tend  to  combine  and  to  concentrate  at  the  point  of  maxi- 
mum advantage. 

9.  The  industrial  development  of  this  country  has  fol- 
lowed the  course  indicated  in  the  preceding  paragraph. 
Prior  to  the  Civil  War  transportation  was  inefficient; 
factories  were  small  local  concerns,  being  suited  to  the  com- 
munities where  they  existed.  At  the  middle  of  the  century 
87.5  per  cent  of  the  population  was  rural.  The  aver- 
age farm  family  lived  a  life  of  self-sufficiency.  The  farmer 
produced  his  own  fuel,  grain,  meat,  leather,  vegetables, 
milk,  butter,  poultry,  wool,  flax,  and  cotton.  In  the  home 
were  rather  crude  means  of  converting  many  of  these  raw 
materials  into  finished  products. 

There  was  a  limited  amount  of  trading,  of  course,  but 
the  nature  of  the  commodities  produced  for  trade  differed 
with  respect  to  the  distance  from  the  market.  In  western 
Pennsylvania  grain  was  converted  into  spirits,  and  other 
communities  distant  from  the  market  produced  light  goods 
of  little  bulk  and  large  value.  Many  farmers,  especially 
west  of  the  Alleghanies,  turned  to  raising  swine,  cattle,  and 
horses,  which  could  be  driven  to  the  market. 

But  the  war  taught  the  lesson  of  doing  things  on  a  large 
scale.  By  the  end  of  the  century  we  had  the  enormous 
total  of  194,262  miles  of  railway.  Add  to  this  network  of 
railways  the  means  of  instantaneous  connection  by  wire 


m 


Introduction  to  Economics 


and  an  excellent  postal  system,  and  we  have  the  chief  ex- 
planation of  the  localization  and  concentration  of  indus- 
tries. 

10.  The  growth  of  cities  has  been  in  keeping  with  these 
industrial  changes.  Large-scale  production  implies  the 
use  of  large  mechanical  equipment.  Machine  production 
is  more  effective  in  manufacturing  than  in  agriculture. 
This  fact  gives  the  urban  centres  the  advantage  over  rural 
communities.  Other  reasons  attract  manufacturers  to  the 
large  centres  of  population.  A  large  factory  finds  it  nec- 
essary to  be  in  the  midst  of  a  large  and  varied  supply  of 
labor.  The  advantages  of  marketing  and  of  transportation 
facilities  are  found  in  the  city.  An  item  of  no  little  signifi- 
cance is  that  of  proximity  to  other  manufacturers.  Fac- 
tories depend  on  each  other  for  special  parts  and  assist- 
ance in  many  ways.  Nearness  to  professional  men  who 
can  provide  medical  aid,  or  give  legal  advice,  or  render 
expert  opinions  on  divers  questions,  is  very  necessary. 

ii.  An  example  from  statistics  will  make  clear  the  ten- 
dency toward  concentration.  The  statistics  of  the  manu- 
facturing of  agricultural  implements  is  given  in  the  fol- 
lowing table.    These  will  be  found  characteristic  of  most 


AGRICULTURAL  IMPLEMENTS 

Year 

Product 
(in  millions) 

Capital 
(in  millions) 

Wage-earners 

No.  of 
establishments 

1850 

i860 

$6.8 
20.8 
52-1 
68.6 
81.3 
101 . 2 
112. 0 

$3 
13 
34 
62 

145 
157 
196 

6 

9 
8 

1 
3 
7 
7 

7,220 
17,093 
25,249 
39,58o 
38,827 
46,582 

47,394 

!,333 
2,116 
2,076 

i,943 
910 

715 
648 

1870 

1880 

1890 

1900 

1905 

The  Present  Economic  Order 


63 


lines  of  industry.  These  figures  show  that  in  manufactur- 
ing capital  increases  more  rapidly  than  labor.  While  capi- 
tal was  increasing  from  $3,600,000  to  $196,700,000,  the 
increase  in  the  number  of  laborers  was  from  7,220  to.47,394. 
It  is  especially  noteworthy  that  while  the  product  increased 
from  $6,800,000  to  the  enormous  sum  of  $112,000,000  there 
was  a  decrease  in  the  number  of  plants  from  1,333  to  648. 
This  tendency  may  be  shown  with  respect  to  the  ten- 
dency of  labor  to  congregate.  The  following  table  shows 
what  percentage  of  the  total  persons  employed  in  Ger- 
many at  certain  dates  were  engaged  in  manufacturing 
establishments  of  different  size. 


Per  cent  of  persons  doing  work  alone 

Per  cent  of  persons  in  establishments  employing 

2  to  5  persons 

Per  cent  of  persons  in  establishments  employing 

6  to  10  persons 

Per  cent  of  persons  in  establishments  employing 

11  to  50  persons 

Per  cent  of  persons  in  establishments  employing 

51  to  200  persons 

Per  cent  of  persons  in  establishments  employing 

201  to  1 ,000  persons 

Per  cent  of  persons  in  establishments  employing 

over  1 ,000  persons 


1882 


25.2 
29.9 

6.0 
12.6 
11. 9 
10.9 

3-5 


189s 


16.4 

23 -5 
7.2 
16.6 
17.0 
13-9 
5-4 


1907 


10. 1 
19.4 
6.6 
18.4 
20. 1 

17-3 
8.1 


(Table  taken  from  Taussig's  Principles  of  Economics,  vol.  I,  p.  52.) 

The  reasons  for  the  rapid  growth  of  large-scale  produc- 
tion will  be  considered  in  a  later  chapter.  Enough  has 
been  said  to  show  that  in  the  present  economic  order  the 
vast  size  and  complexity  of  modern  industrial  estab- 
lishments present  a  striking  contrast  to  conditions  of  a 
century  ago,  and  especially  to  conditions  prior  to  the 
Industrial  Revolution. 


64  Introduction  to  Economics 

12.  The  geographic  division  of  labor  refers  to  the  local- 
ization of  industries,  according  to  the  principle  of  maximum 
returns.  With  transportation  facilities  and  markets  well 
developed,  an  industry  tends  to  localize:  (i)  Where  there 
is  a  supply  of  skilled  labor  in  that  particular  industry,  or 
in  some  cases  where  labor  is  cheap.  Certain  industries 
make  extensive  use  of  woman  and  child  labor,  while  others, 
as  the  steel  industry,  use  only  the  labor  of  men.  In  a 
city  where  steel  is  the  important  industry  the  slight  de- 
mand for  the  services  of  women  and  children  causes  such 
labor  to  be  cheap.  This  situation  is,  other  things  equal, 
an  attractive  centre  for  a  cotton-mill.  (2)  Where  soil  and 
climate  are  most  suitable  for  the  products  of  the  industry, 
e.  g.,  we  find  orange-growing  in  Florida,  apple-growing  in 
Washington,  and  tobacco-raising  in  Kentucky.  (3)  Where 
fuel,  raw  materials  or  water-power  necessary  for  the  in- 
dustry are  at  hand  or  easily  obtainable.  (4)  Where  large 
markets  for  the  output  are  of  easy  access. 

One  will  rarely  find  a  single  district  embodying  all  of 
these  advantages.  Not  infrequently  localized  industries 
exist  apart  from  any  of  these  advantages.  The  reason  for 
this  is  that  industries  requiring  large  fixed  capital  are  diffi- 
cult to  move  with  changing  conditions.  They  start  under 
favorable  conditions  and  become  firmly  rooted,  their  place 
of  business  becomes  known,  their  good-will  and  business 
prestige  are  associated  with  their  place  of  being.  Such 
reasons  account  for  the  persistence  of  extensive  metal 
works  in  New  England,  despite  the  fact  that  iron  ore  is  no 
longer  smelted  there. 

An  enterpriser  is  at  liberty  to  invest  where  the  returns 
are  most  promising,  and  quite  naturally  he  will  invest  his 
energy  and  capital  where  nature  promises  most  co-opera- 


The  Present  Economic  Order  65 

tion.  Each  enterpriser  acts  on  the  principle  of  maximum 
returns  for  his  own  efforts.  This,  however,  does  not  mean 
the  maximum  returns  per  acre  or  per  machine.  Suppose 
it  takes  the  same  labor  and  capital  to  cultivate  five  acres 
of  tobacco  at  a  net  profit  of  $500  per  acre  as  it  would  to 
cultivate  forty  acres  of  potatoes  at  a  net  profit  of  $100  per 
acre,  one  will  plant  potatoes.  The  geographic  division  of 
labor  follows  the  principle  of  greatest  net-profit  return. 

We  have  thus  far  studied  a  division  of  labor  with  respect 
to  the  different  localities  where  industries  are  located.  We 
may  now  turn  to  a  study  of  the  division  of  labor  in  the 
same  locality  and  within  the  same  plant. 

13.  The  Division  of  Labor  and  Mutual  Dependence  in 
the  Factory  System. — The  handicraft  stage  of  production 
was  essentially  individualistic,  whereas  the  factory  system 
is  characterized  by  large  capital  and  congregated  labor. 
The  tendency  of  large  capital  is  to  specialize.  Not  many 
years  ago  the  same  shop  produced  many  and  varied  lines 
of  goods.  More  recently  competition  has  forced  the  shop 
to  concentrate  on  fewer  lines  of  goods.  Representative 
shops  have  now  abandoned  the  practice  of  making  even 
their  own  small  tools  and  appliances.  They  buy  such  sup- 
plies cheaper  than  they  can  manufacture  them.  In  manu- 
facturing the  matter  is  reduced  to  this:  a  factory  which 
concentrates  on  a  few  products  can  reduce  the  cost  per 
unit  of  its  output  to  a  minimum.  It  can  undersell  its  less 
specialized  competitor.  The  consequence  is  that  factories 
are  no  longer  independent;  they  are  mutually  dependent. 
They  are  dependent  upon  each  other  for  their  own  tools 
and  appliances  as  they  are  upon  the  extractive  industries 
for  raw  materials. 

The  force  of  competition  has  so  narrowed  the  produc- 


66  Introduction  to  Economics 

tive  process  along  certain  lines  that  little  flexibility  is  left. 
Each  tool  and  machine  is  designed  to  fit  its  specific  func- 
tion, and  no  other.  The  worker  has  his  task  narrowed 
and  limited  by  the  same  conditions.  The  jack  of  all  trades 
finds  no  place  in  the  modern  factory  system.  As  man  de- 
velops, his  desires  call  for  a  greater  variety  and  a  superior 
quality  of  goods,  but  in  the  field  of  production  he  tends 
from  a  varied  to  a  concentrated  production.  A  report 
of  the  United  States  Bureau  of  Labor  states  that  there  are 
eighty-four  distinct  processes  in  the  manufacture  of  a  com- 
mon pair  of  brogan  shoes.  One  hundred  pairs  of  these 
are  now  turned  out  in  ninety-eight  minutes,  whereas  to 
sew  them  by  hand  would  take  ninety-eight  hours.  More- 
over, a  workman  may  be  skilled  in  one  of  these  processes 
and  ignorant  of  the  other  eighty-three. 

It  is  a  complex  division  of  labor  when  a  process  of  pro- 
duction is  thus  subdivided  into  many  parts.  A  simple 
division  of  labor  is  found  when  a  workman  carries  through 
the  whole  of  one  of  the  stages  of  production.  There  was 
no  division  of  labor  in  the  self-sufficing  community  where 
the  same  laborer  would  raise  cattle,  tan  the  hides,  and 
convert  the  leather  into  shoes  for  his  family.  It  came  to 
be  a  simple  division  of  labor  when  one  raised  cattle,  another 
tanned  hides  and  yet  another  made  shoes.  And  it  devel- 
oped into  a  complex  division  of  labor  when  each  of  these 
stages  of  production  was  subdivided  into  fractional  parts. 

14.  Differentiation. — Development  takes  the  form  of 
differentiation  in  social  life  as  well  as  in  animal  life. 
Through  a  process  of  evolution  animals  acquire  more  and 
more  specific  organs  for  the  performance  of  specific  func- 
tions. Instead  of  one  organ  to  serve  for  the  functions  of 
heart,  lungs,  stomach,  etc.,  mutually  dependent  organs  are 


The  Present  Economic  Order  67 

gradually  developed.  Similarly,  in  social  life  and  in  indus- 
tries there  is  a  gradual  development  of  mutually  dependent 
agencies  to  perform  various  functions.  At  one  time  the 
same  person  would  convert  the  raw  material  into  cloth, 
finance  his  own  efforts,  bear  his  own  risk,  pack  and  carry 
his  products  from  place  to  place  in  search  of  a  buyer.  This 
work  has  been  differentiated  into  manufacturing,  banking, 
insurance,  commission  men,  transportation,  and  merchan- 
dising. 

15.  Trading  or  exchanging  arises  out  of  differentiation. 
It  is  most  obvious  that  when  men  are  differentiated  and 
specialized  with  respect  to  specific  lines  of  employment 
they  must  be  mutually  dependent.  If  one  gives  his  entire 
time  and  attention  to  the  production  of  matches  he  will 
soon  have  a  surplus  of  matches  and  a  want  for  other  things. 
Every  form  of  specialization  results  in  the  production  of  a 
surplus.  Each  producer  depends  upon  the  surplus  of 
others.  Without  the  hatter  the  farmer  would  go  bare- 
headed, and  without  the  farmer  the  hatter  would  starve. 
Specialization  and  mutual  dependence  necessitate  trade 
and  the  surpluses  are  the  things  exchanged  for  each 
other.  Exchange  is  the  grand  medium  through  which 
proportion  and  balance  are  maintained  among  the  various 
parts  of  the  present  economic  order. 

16.  Competition  is  an  institution  in  which  men  selfishly 
and  independently  contest  for  the  uses  of  wealth.  Men 
compete  to  outdo  each  other  in  the  market.  One  mer- 
chant would  take  trade  from  another,  one  railroad  strives 
to  excel  its  competitor,  and  so  on  throughout  all  the  lines 
of  business.  There  are  different  kinds  of  competition: 
jockeys  compete  for  the  blue  ribbon,  wooers  compete  for 
the  prettiest  girl,  politicians  for  office,  and  actresses  for 


68  Introduction  to  Economics 

notoriety.  But  economic  competition  is  a  contest  for  the 
uses  of  wealth.  There  is  no  competition  for  free  goods. 
Were  all  goods  as  abundant  as  air,  competition  would  not 
exist.  Competition  is  for  the  ownership  of  scarce  things. 
Thus  competition  is  tied  up  with  the  idea  of  scarcity  and 
private  property. 

We  have  seen  that  scarcity  does  not  refer  to  the  amount 
of  goods  but  to  the  strength  of  the  desire  for  goods.  There 
may  be  an  abundance  of  corn,  yet  if  there  are  many  con- 
sumers and  the  desires  intense,  we  may  say  that  corn  is 
scarce.  On  the  other  hand,  there  may  be  few  bumble- 
bees and  no  one  would  speaK  of  them  as  scarce.  If  re- 
sources are  limited  they  may  increase  in  scarcity  and  the 
competition  for  them  grow  keen.  Such  is  the  case  with  a 
growing  density  of  population.  When  numbers  multiply 
with  respect  to  resources  competition  sets  in  for  the  con- 
trol of  food  and  the  services  rendered  by  these  resources. 

Also  competition  may  grow,  irrespective  of  the  increase 
of  population,  because  of  increasing  desires  for  goods.  De- 
sires increase  as  they  are  fed,  thus  extending  the  reach  of 
social  ambition.  To  give  one  a  million  seems  to  whet  his 
appetite  for  more  rather  than  to  satisfy  him.  The  increase 
of  population  reinforced  by  the  growth  of  desires  causes 
competition  to  become  constantly  keener.  The  two  causes 
mentioned — growing  numbers  and  desires  relative  to  re- 
sources—are primary  though  not  the  only  motives  that 
inspire  economic  competition. 

17.  The  Extent  of  Competition. — Competition  is  found 
in  every  stage  of  production,  from  the  raw  material  to  the 
finished  product  in  the  hands  of  the  consumer.  "The 
manufacturer  of  cotton  goods  chooses  between  competing 
places  for  his  factory;  the  makers  of  his  machinery  are 


The  Jfresent  Kconomic  Order  69 

vying  with  each  other  to  produce  most  economically  the 
engines,  looms,  etc.,  that  are  best  adapted  to  his  work;  raw 
products  he  buys  from  sellers  competing  in  the  open  mar- 
ket; labor  he  hires  from  among  men  who  bid  against  each 
other  for  his  work;  transportation  companies  compete  with 
one  another  in  cheaply  transferring  his  goods  to  market; 
and  in  the  market,  seller  is  struggling  with  seller  for  the 
privilege  of  a  sale  with  profit;  buyer  and  seller  bargain  to- 
gether, to  agree  on  a  price.  The  present  century  has  seen 
barrier  after  barrier  swept  away,  till  the  whole  world  enters 
more  or  less  freely  into  the  one  struggle;  family  and  social 
distinctions  are  being  obliterated  in  the  industrial  world; 
customs  and  laws  in  restraint  of  trade  have  been  set  aside." l 

18.  Self-interest,  in  a  narrow  sense,  would  seek  private 
gain  at  the  expense  of  others.  The  farmer  may  wish  for 
the  grubworm  and  boll- weevil  to  take  the  cotton  crop,  spar- 
ing his  own,  in  order  that  prices  for  his  product  might  be 
high.  The  doctor  of  medicine  may  wish  for  his  neighbors 
to  be  sick  and  for  his  competitors  to  fail  in  order  that  his 
practice  may  be  increased.  But  if  the  neighbors  are  sick 
their  production  is  cut  short  and  little  is  left"  with  which 
to  pay  the  doctor.  Or  if  his  competitors  fail  others  will 
spring  up  to  take  their  places.  Despite  these  counteract- 
ing arguments  it  often  happens  that  one  is  interested,  and 
with  good  reason,  in  the  failure  of  other  producers  within 
his  own  particular  field  of  employment. 

There  is  no  exception  to  the  principle  that  it  is  to  one's 
self-interest  that  his  neighbors  in  other  fields  of  employ- 
ment succeed.  The  carpenter  reasons  that  if  his  neighbor 
is  favored  with  a  large  crop,  grain  will  be  abundant  and 
cheap.  His  wages  will  go  further  when  the  production  of 
1  Fairbanks's  Introduction  to  Sociology,  New  York,  1905,  p.  270. 


70  Introduction  to  Economics 

food,  clothing,  and  necessities  are  so  abundant  as  to  cause 
low  prices.  The  real  fact  of  exchange  is  obscured  by  the 
use  of  money.  Money  is  but  a  medium  of  exchange;  the 
real  exchange  consists  of  a  transfer  of  goods  or  services  for 
other  goods  or  services.  We  produce  for  the  market  and 
largely  buy  what  we  consume  from  the  market.  Every 
commodity  produced  is  a  demand  for  another  commodity. 
It  is  to  one's  self-interest  to  have  large  purchasing  power. 
Large  purchasing  power  consists  both  in  large  production 
for  one's  self,  thereby  augmenting  one's  command  over 
the  products  of  others,  and  in  a  large  production  on  the 
part  of  others  in  order  that  the  market  prices  which  he 
pays  will  be  low. 

10.  Economic  Classes. — In  a  highly  organized  competi- 
tive society  there  are  different  classes  to  perform  the  differ- 
ent economic  functions  of  such  a  society.  We  ordinarily 
distinguish  three  classes:  laborers,  capitalists,  and  entre- 
preneurs. In  a  simpler  state  of  society  where  man  pro- 
vided his  own  food,  wore  clothes  woven  and  made  at  home, 
built  his  own  home  and  fashioned  the  tools  he  used,  the 
means  of  production  were  simple  and  owned,  for  the  most 
part,  by  the  laborer.  This  condition  prevailed  prior  to  the 
Industrial  Revolution,  and  there  was  no  sharp  distinction 
as  between  laborers  and  capitalists.  But  with  the  intro- 
duction of  large  machinery  too  expensive  to  be  owned  by 
workmen,  separate  classes  arose.  The  one  bought  ma- 
chines, constructed  plants,  and  financed  concerns,  while 
the  other  worked  for  a  wage.  Again,  we  find  those  who 
own  wealth  who  are  in  no  position  to  use  it  themselves.  A 
child  may  inherit  a  fortune,  a  widow  may  acquire  her  hus- 
band's estate,  or  a  wealthy  business  man  may  retire  from 
active  service — such  are  capitalists  in  the  true  sense  of 


The  Present  Economic  Order  71 

the  word.  Now,  if  the  owner  of  wealth  (the  capitalist)  be 
incapacitated  to  employ  his  means,  and  if  the  laborer,  as 
such,  be  empty-handed,  what  becomes  of  production? 
Labor  alone  or  wealth  alone  can  produce  nothing.  A 
third  party,  the  entrepreneur,  is  necessary.  And  who  is 
the  entrepreneur?  He  is  the  man  who  places  labor  and 
wealth  in  productive  combination.  The  function  of  the 
entrepreneur  is  to  plan  a  business,  to  borrow  the  wealth, 
hire  the  labor,  and  co-ordinate  these  into  a  going  concern. 
The  entrepreneur  undergoes  the  responsibility,  bears  the 
risk,  and  suffers  the  loss  or  takes  the  net  gain,  as  the  case 
may  be. 

These  three  functions — performed  by  labor,  capital,  en- 
terprise— are  distinct,  although  the  same  man  may  per- 
form two  or  all  three  of  them.  The  same  man  may  at  the 
same  time  hold  the  offices  of  trustee  of  a  school,  county 
sheriff,  and  presidency  of  his  secret  order.  These  functions 
are  different,  although  cared  for  by  the  same  man.  Labor, 
capital,  and  enterprise  hold  distinct  functions  and  people 
are  roughly  classified  with  respect  to  them.  The  next 
institution  within  the  present  economic  order  to  be  dis- 
cussed is  the  contract. 

20.  Contracts. — To-day  business  is  complex  and  world- 
wide in  its  scope.  Our  producers  are  constructing  large 
plants,  investing  enormous  sums  of  wealth,  employing  large 
forces  of  labor,  and  making  agreements  months  or  even 
years  ahead  for  the  fulfilling  of  future  contracts  and  for 
supplies  of  raw  materials.  They  are  producing  for  distant 
as  well  as  for  domestic  markets.  Our  importers  are  con- 
tracting with  oriental  countries  long  in  advance  for  the 
future  delivery  of  laces,  silks,  and  tapestries.  Railroads 
are  contracting  ahead  with  the  steel  corporation  for  the 


72  Introduction  to  Economics 

future  delivery  of  rails,  which  as  yet  are  not  in  existence. 
Industries  are  forced  to  depend  upon  each  other.  This  is 
an  age  of  credit.  The  larger  portion  of  business  is  done 
on  a  credit  basis.  Credit  is  an  implied  or  an  expressed 
contract  to  pay  in  the  future.  Were  men  not  free  to  make 
contracts  or  could  these  contracts  be  broken  with  im- 
punity, our  industrial  structure  could  not  exist  for  a  fort- 
night. 

21.  The  Automatic  Regulation  of  Industry. — The  pri- 
mary characteristic  of  our  economic  order  is  the  inter- 
dependence of  men  in  society.  We  are,  in  reality,  orga- 
nized on  the  basis  of  co-operation.  There  is  a  grand  ad- 
justment of  man  to  man,  of  industry  to  industry,  which  is 
maintained  automatically  by  means  of  exchanging  in  the 
market.  The  complex  of  industries  (mining,  farming, 
manufacturing,  transportation,  etc.)  are  adjusted  to  each 
other,  as  are  the  tiny  parts  of  delicate  machinery,  and  this 
adjustment  is  maintained  by  a  price  regime.  If  too  many 
mine  coal  and  too  few  work  in  the  textile  trade,  coal  will 
be  abundant  and  cheap,  textiles  scarce  and  dear.  Labor 
and  wealth  will  receive  small  returns  in  the  one  and  large 
returns  in  the  other.  A  shift  of  productive  energy  will 
slowly  take  place  from  the  less  to  the  more  remunerative 
employment.  The  result  of  this  shift  will  be  that  less 
coal  is  mined,  its  price  will  be  higher,  and  the  returns  to 
labor  and  capital  increased.  The  reverse  of  these  move- 
ments will  be  felt  in  the  textile  trade.  And  the  result  of 
these  movements  will  be  an  equilibrium.  The  self-interest 
of  each  and  all  to  secure  the  largest  returns  so  operates, 
through  exchanges  on  the  market,  as  to  tend  always  to 
maintain  an  equilibrium  in  the  present  competitive  order. 
The  truth  of  this  statement  is  evidenced  throughout  the 


The  Present  Economic  Order  73 

whole  field  of  industry.  It  is  the  language  of  ignorance 
which  says  that  we  are  living  in  a  chaotic  and  unregulated 
economic  order. 

22.  Exercises. — i.  Does  an  economic  law  state  a  com- 
mand or  does  it  state  merely  an  observed  relation?  Can 
it  state  both  of  these?  Are  economic  laws  subject  to 
exceptions.  Is  it  correct  to  say  that  "the  numerous  ex- 
ceptions to  the  law  of  wages  make  it  impossible  to  predict 
the  outcome"?  Can  we  "violate"  a  law  of  chemistry  or 
an  economic  law? 

2.  Can  one  properly  use  the  words  theory  and  law  inter- 
changeably ?  One  frequently  encounters  these  expressions, 
"the  theory  of  wages"  and  "the  law  of  wages."  Do  they 
have  the  same  meaning  ? 

3.  Define  private  property.  Are  all  of  the  following  ex- 
amples of  private  property:  one's  hat,  the  Lincoln  High- 
way, the  Chesapeake  and  Ohio  Railroad,  a  jitney  bus? 
Name  four  things  which  may  be  either  public  or  private 
property. 

4.  What  is  the  connection  between  paragraphs  6  and  7 
in  this  chapter? 

5.  State  the  causal  sequence  existing  between  the  follow- 
ing: industrial  development,  growth  of  cities,  extension  of 
transportation,  trade  between  localities,  the  geographic 
division  of  labor. 

6.  Could  there  be  large-scale  production  without  exten- 
sive transportation? 

7.  What  is  a  technical  division  of  labor?  and  what 
conditions  make  it  possible  ? 

8.  "All  other  organs,  therefore,  jointly  and  individually, 
compete  for  blood  with  each  organ,  so  that,  though  the 
welfare  of  each  is  indirectly  bound  up  with  that  of  the  rest, 
yet,  directly,  each  is  antagonistic  to  the  rest."  "Evidently 
this  process  (of  enlargement  of  an  industry  or  develop- 
ment of  a  district  whose  products  are  in  unusual  demand) 
in  each  social  organ,  as  in  each  individual  organ,  results 


74  Introduction  to  Economics 

from  the  tendency  of  the  units  to  absorb  all  they  can  from 
the  common  stock  of  materials  for  sustentation;  and  evi- 
dently the  resulting  competition,  not  between  units  simply, 
but  between  organs,  causes  in  a  society,  as  in  a  living  body, 
high  nutrition  and  growth  of  parts  called  into  greatest 
activity  by  the  requirements  of  the  rest." 

Explain  the  doctrine  of  the  first  sentence  and  show  how 
it  applies  to  society.  What  light  is  here  thrown  on  com- 
petition as  a  mode  of  growth,  and  on  the  general  laws  of 
life  of  which  competition  is  one  phase?  (Quotation  taken 
from  Spencer's  Principles  of  Sociology,  by  Sumner.) 

9.  What  is  the  relationship  between  the  "doctrine  of 
self-interest"  and  competition? 

10.  Briefly  summarize  the  chief  institutions  in  the  pres- 
ent economic  order. 


CHAPTER   V 
THE  SUBJECT-MATTER  OF  ECONOMICS 

i.  The  subject-matter  of  economics.  2.  Productive  capacity  and  current 
supplies.  3.  Destruction  often  a  real  gain.  4.  The  dissemination  of  educa- 
tion. 5.  Social  wealth.  6.  Wealth  formerly  defined  as  capacity.  7.  Wealth 
not  a  comparative  concept.  8.  Private  wealth  and  public  wealth.  9.  Per 
capita  wealth  and  national  wealth.  10.  Increasing  aggregate  wealth  and 
diminishing  per  capita  wealth.  11.  View-points  in  autocratic  and  demo- 
cratic countries.  12.  Wealth  and  property.  13.  Capital  and  wealth. 
14.  The  money  expression  of  wealth.  15.  Economics.  16.  Economic  laws 
and  social  institutions.  17.  The  goal  of  public  policy.  18.  Changes  in 
economics.  19.  Economics  and  political  reforms.  20.  Economics  and 
business.     21.  Exercises. 

i.  The  Subject-Matter  of  Economics. — The  problems 
which  concern  the  economist  have  their  origin  in  man's 
struggle  for  the  necessities,  comforts,  and  conveniences  of 
life.  To  gratify  these  desires  is  the  motive  of  all  the  eco- 
nomic activities  of  man.  Whether  in  the  sweat-shop  or 
in  the  counting-house,  human  endeavor  is  guided  by  the 
one  motive  of  gratifying  desires.  Necessities  and  con- 
veniences, such  as  food,  clothing,  and  luxuries  which 
directly  gratify  desires,  are  termed  current  supplies.  Life 
depends  on  current  supplies,  yet,  without  a  constant  source 
of  replenishment,  the  present  amount  of  these  would  be 
exhausted  within  a  few  months.  This  constant  source  of 
replenishment — which  we  shall  term  productive  capacity — 
is  the  basis  of  the  science  of  economics.  Its  paramount 
significance  demands  for  it  thorough  comprehension. 

Productive  capacity  is  conditioned  by  natural  resources, 

and  the  industrial  arts,  together  with  the  enterprise  and 

75 


76  Introduction  to  Economics 

knowledge  which  utilize  them.  Productive  capacity,  re- 
sulting, as  it  does,  from  the  co-operation  of  man  with 
nature,  is  the  source  from  which  necessities,  comforts,  and 
conveniences  flow  to  gratify  desires.  In  our  study  of  pro- 
ductive capacity  we  must  realize  that  any  one  factor  by 
itself  is  meagrely  productive.  Brick  and  mortar  cannot 
build  a  wall,  nor  can  the  plough  turn  a  furrow  without  the 
co-operation  of  labor.  Productive  capacity  necessitates  a 
combination  of  agents,  and  the  better  the  apportionment 
of  these  agents,  the  more  effective  is  the  combination. 
The  functioning  of  this  productive  capacity  and  the  dis- 
tribution of  its  yield  among  consumers  constitute  the  sub- 
ject-matter of  economics. 

2.  Productive  Capacity  and  Current  Supplies. — The  dis- 
tinction between  productive  capacity  and  current  supplies 
is  frequently  exemplified  in  cases  of  recovery  after  loss. 
The  commonest  cases  of  loss  or  destruction  are  in  connec- 
tion with  current  supplies.  Our  productive  capacity  in 
the  form  of  climate,  lands,  harbors,  and  the  fund  of  knowl- 
edge accumulated  and  passed  on  to  us  from  former  gener- 
ations, is  little  impaired  by  the  devastating  effects  of  fires, 
floods,  earthquakes,  and  wars.  These  agencies  of  destruc- 
tion, however,  may  play  havoc  with  such  current  supplies 
as  ships,  homes,  live  stock,  and  crops,  but  full  restoration 
is  soon  accomplished.  Soon  after  the  earthquake  and  fire 
San  Francisco  had  advanced  to  a  state  of  unprecedented 
excellence.  After  the  Chicago  and  Baltimore  fires  the 
cities  were  not  only  quickly  rebuilt  but  were  noticeably 
improved.  Narrow,  crooked  streets  and  dilapidated  build- 
ings were  supplanted  by  broad  pavements  and  permanent 
structures  of  brick  and  stone.  Such  experiences  give  us 
the  expression,  "It  takes  a  fire  to  make  a  city."     Floods 


The  Subject- Matter  of  Economics  77 

may  devastate  the  valleys  of  the  Ohio  and  the  Mississippi, 
but  after  a  brief  interval  the  damages  are  fully  repaired. 
The  direct  losses  of  our  Civil  War  were  beyond  comprehen- 
sion, yet  within  a  few  years  we  were  more  prosperous  than 
ever.  Merely  temporary  impoverishment  is  occasioned  by 
the  destruction  of  current  supplies,  if  only  the  source  of 
such  supplies  remains  intact.  When  there  is  no  dread  of 
recurring  calamity  to  paralyze  incentive,  and  when  natural 
resources,  together  with  knowledge  and  scientific  equip- 
ment, remain  undiminished,  there  is  a  rapid  reproduction 
of  current  supplies.  They  differ  from  productive  capacity 
as  the  apple  differs  from  the  tree,  or  the  crop  from  the 
farm.     The  latter  is  the  source;  the  former  is  the  usufruct. 

3.  Destruction  Often  a  Real  Gain. — An  enemy  may  lay 
waste  a  country  by  fire  and  sword ;  he  may  carry  off  mova- 
ble wealth,  trample  crops,  burn  factories  and  homes,  yet 
there  is  no  essential  difference  between  these  wastes  and 
the  wastes  in  time  of  peace.  It  is  no  more  wasteful 
to  burn  a  bridge,  than  not  to  utilize  the  agencies  to 
build  it. 

These  periods  of  destruction,  moreover,  often  teach  valu- 
able lessons  of  construction.  The  Civil  War  taught  us  to 
concentrate  the  efforts  of  a  multitude  of  men.  Under  tre- 
mendous necessity  we  were  forced  to  produce  munitions, 
food,  and  naval  supplies  on  an  unprecedented  scale.  In 
peaceful  times  the  hampering  effect  of  customs,  class  spirit, 
and  industrial  evils  tends  to  deepen  rather  than  to  vanish. 
The  breakdown  of  these  is  a  wholesome  effect  of  war.  The 
weakening  of  special  privilege  and  the  liberation  of  new 
ideas  prepare  the  way  for  a  new  dynamic  progress.  For 
instance,  our  Civil  War  gave  impulse  to  the  invention  and 
use  of  labor-saving  machinery.     "From  4,363  patents  in 


78  Introduction  to  Economics 

i860 — the  high- water  mark  up  to  that  time — the  number 
rapidly  grew  to  8,874  in  1866.  In  1869  the  number  of 
patents  issued  reached  12,957." 

That  which  appears  most  destructive  often  embodies  the 
elements  of  greatest  progression.  The  lessons  of  war  are 
the  lessons  of  enforced  saving,  of  austere  living,  of  large 
organization  and  operation,  of  large  production  where 
greatest  efficiency  is  enforced  by  military  and  financial 
necessity.  When  applied  to  the  industries  of  peace  these 
lessons  had  the  effect  of  an  economic  new  birth.  In  the 
South  a  new  growth  took  place  after  the  war  that  would 
have  been  impossible  in  a  knd  of  slaves,  poor  whites,  and 
contented  plantation-owners.  Thus  it  is  seen  that  produc- 
tive capacity  may  be  increased  fully  as  well  by  the  more 
effective  utilization  of  old  forces  as  by  the  harnessing  of 
new. 

4.  The  dissemination  of  education  increases  productive 
capacity.  Ignorant  tribes  perish  where  natural  resources 
are  richest.  There  is  evidence  that  Indian  tribes  wasted 
away  in  the  fertile  valleys  of  the  Missouri  and  Mississippi 
Rivers.  The  gains  of  civilization  are  measured  not  by 
things  produced  but  by  the  knowledge  of  how  to  produce 
them.  As  our  fund  of  knowledge  increases,  our  control 
over  nature  becomes  more  effective.  Through  education, 
this  knowledge  and  the  means  of  applying  it  become  com- 
mon property.  The  productive  capacity  of  the  country  is 
increased  by  the  dissemination  of  knowledge  precisely  as 
though  the  soil  were  made  more  fertile  or  the  mines  richer. 
Science,  invention,  education,  industrial  organization,  de- 
velopment in  transportation,  new  banking  facilities,  stead- 
ily enlarge  this  productive  capacity.  In  this  process  of 
enlargement  our  industrial  equipment  may  be  scrapped,  to 


The  Subject- Matter  of  Economics  79 

be  replaced  by  the  newer  and  more  efficient;  but  produc- 
tive capacity  is  increased. 

5.  Social  wealth  includes  productive  capacity  and  cur- 
rent supplies.  It  is  the  direct  and  indirect  means  of  grat- 
ifying our  desires  for  the  necessities,  comforts,  and  luxuries 
of  life.  We  cannot  define  social  wealth  by  an  enumeration. 
We  no  more  define  social  wealth  by  enumerating  the  things 
which  compose  it  than  we  define  the  word  house  by  mak- 
ing a  tabulation  of  brick,  stone,  nails,  and  cement.  We 
may  say,  in  truth,  that  wealth  embodies  usable  natural 
resources,  such  as  land,  harbors,  and  minerals;  the  knowl- 
edge of  science  and  organization;  facilitating  agencies,  as 
money  and  technological  equipment,  and  all  consumable 
goods.  But  we  cannot  get  a  full  concept  of  wealth  by 
enumerating  the  things  which  combine  to  make  wealth. 
A  battalion  is  stronger  in  battle  as  a  unit  than  as  many 
men  acting  as  individuals,  and  a  battalion  under  a  good 
commander  is  more  effective  than  one  under  a  poor  com- 
mander. A  thousand  men  in  a  well-ordered  factory,  where 
there  is  a  minute  division  of  labor,  are  far  more  productive 
than  the  same  thousand  men  acting  as  individual  units. 
There  is  no  greater  element  in  productive  capacity  than  the 
power  of  organization.  You  cannot  determine  the  pro- 
ductive capacity  of  a  factory  by  an  enumeration  of  engines, 
tools,  buildings,  land,  raw  materials,  and  the  like.  The 
physical  equipment  of  two  railroads  may  be  precisely  the 
same — in  rails,  ties,  rolling-stocks,  stations,  etc.,  yet  they 
may  have  vastly  different  capacities.  This  might  be  due 
to  unlikeness  in  management,  or  to  unlike  situations  with 
respect  to  other  industries  winch  railroads  serve.  There 
is  no  definite  measure  of  social  wealth.  And  there  is  no 
practical  need  of  such  measure.     President  Hadley  is  suf- 


80 


Introduction  to  Economics 


ficiently  correct:  "The  nation's  wealth  is  to  be  found  in  the 
enjoyments  of  its  members." 

Natural  Resources 
•   Scientific  Knowledge 

Organization 


'  Basic  Wealth 


Social  Wealth 


Facilitating  Wealth    j  M°°n*y 


Consumable  Wealth 


Food 

Shelter 

Conveniences 


While  this  classification  involves  some  overlapping,  it 
serves  to  make  clear  the  concept  of  social  wealth. 

6.  Many  writers  of  a  century  ago  limited  wealth  almost 
wholly  to  capacity.  Lord  Lauderdale  (an  English  econ- 
omist of  the  last  century)  furnished  us  with  the  note- 
worthy example  of  a  privately  owned  supply  of  water. 
Water  was  so  scarce  and  so  valuable  that  a  good  well  was 
a  private  fortune.  Improvements  were  made  which  fur- 
nished such  a  supply  of  good  water  as  to  make  the  pri- 
vately owned  well  valueless.  There  the  creation  of  social 
wealth  was  the  destruction  of  private  wealth.  The  Amer- 
ican economists — Daniel  Raymond,  A.  H.  Everett,  Wil- 
lard  Phillips  and  less  noteworthy  writers  of  a  century  ago 
— denned  wealth  as  "national  capacity."  They  would 
not  limit  wealth  to  objects  of  private  property  which  are 
bought,  sold,  and  exchanged.  They  taught  that  national 
productive  capacity  (wealth)  must  include  the  free  as  well 
as  the  slave,  a  salubrious  atmosphere,  and  a  navigable 
river  without  tolls  as  well  as  a  canal  with  tolls.  They 
agreed  with  the  English  economists,  Lord  Lauderdale  and 
David  Ricardo,  who  reasoned  that  if  water  should  become 
scarce  and  high-priced,  the  individual  owners  of  it  would 


The  Subject- Matter  of  Economics  81 

be  richer,  but  society  as  a  whole  would  be  poorer.  They 
would  have  argued  that  a  deeper  channel  for  the  Mississippi 
River  would  be  as  truly  an  object  of  wealth  as  is  an  arti- 
ficial levee  costing  many  millions  of  dollars.  They  would 
have  argued  that  had  Providence  constructed  a  broad- 
flowing  and  navigable  river  from  Colon  to  Panama  it  would 
have  been  an  object  of  wealth  as  truly  as  is  a  man-made 
canal  costing  upwards  of  three  hundred  and  fifty  millions. 

Economic  writings  fall  largely  into  two  groups:  One 
emphasizes  social  wealth  in  the  broad  sense  of  productive 
capacity;  the  other  emphasizes  wealth  in  the  restricted 
sense  of  things  owned.  The  early  American  economists 
emphasized  the  former,  while  the  majority  of  recent  Ameri- 
can economists  emphasize  the  latter.  The  present  work 
recognizes  the  twofold  aspect  of  wealth.  Neither  aspect 
must  be  overlooked,  nor  must  they  be  confused. 

7.  Wealth  Not  a  Comparative  Concept. — Another  mis- 
conception to  be  avoided  is  to  consider  wealth  as  a  com- 
parative term.  The  word  wealth  is  derived  from  the  word 
weal  (from  the  same  root  as  well),  which  means  a  prosper- 
ous state  of  being.  Later  usage  caused  wealth  to  be  ap- 
plied to  the  things  which  produce  a  prosperous  state.  In 
this  sense  it  was  used  comparatively  to  indicate  "that 
abundance  of  worldly  estate  which  exceeds  the  estate  of 
the  greater  part  of  the  community."  We  now  use  the  ad- 
jective rich  in  this  sense.  It  is  proper  to  use  the  word  rich 
in  a  comparative  sense;  it  is  proper  to  say  that  the  rich 
man  has  more  wealth  than  others  or  that  he  has  more  pur- 
chasing power  than  others.  The  word  rich  may  refer  either 
to  the  possession  of  wealth  or  to  the  possession  of  value. 
Wealth  must  not  be  used  in  this  comparative  sense.  The 
meagre  equipment  of  the  cobbler  and  the  plant  of  the 


82  Introduction  to  Economics 

Bethlehem  Steel  Company  are  alike  wealth.  It  would  be 
a  gross  error  to  say  that  a  thing  is  not  wealth  because  it 
does  "not  make  any  one  rich  in  this  comparative  sense." 
Public  highways,  parks,  schools,  and  a  salubrious  climate 
benefit  all  alike,  but  they  are  nevertheless  wealth. 

8.  Private  Wealth  and  Public  Wealth. — For  many  pur- 
poses we  sacrifice  strict  accuracy  and  speak  of  wealth  in 
the  terms  of  the  things  composing  it.  The  practice  of 
buying  and  selling  makes  it  necessary  to  think  of  wealth 
in  terms  of  specific  things  and  units.  Common  usage 
gives  us  the  notion  of  private  wealth,  by  which  is  meant 
the  things  owned  by  individuals.  Private  wealth  includes 
such  things  as  houses,  land,  live  stock,  necessities,  and 
comforts  of  all  kinds.  Further,  private  wealth  includes 
those  things  owned  by  a  corporation  (legal  person) ,  such  as 
railroads,  water-works,  factory-buildings,  and  machinery. 

Public  wealth,  like  private  wealth,  refers  to  the  appro- 
priated things.  It  is  a  broader  term  than  private  wealth, 
including  everything  that  is  owned  by  private  persons  and 
by  governments.  It  includes  public  buildings,  parks,  high- 
ways, public  schools,  state  universities.  The  term  as  com- 
monly used  does  not  include  free  goods,  such  as  climate  or 
large  bodies  of  water. 

Social  wealth  embodies  both  public  and  private  wealth. 
This  may  be  indicated  as  follows: 


Social  wealth 
Publio  wealth 
Private  wealth 


In  the  following  pages  the  word  wealth,  when  used  with- 
out a  modifying  term,  will  signify  social  wealth. 


The  Subject- Matter  of  Economics  83 

9.  Per  Capita  Wealth  and  National  Wealth. — Per  capita 
wealth  means  the  average  wealth  of  the  citizens  of  a  na- 
tion. National  wealth  is  so  used  as  to  mean  the  aggregate 
of  the  wealth  in  a  nation.  A  nation  may  be  comparatively 
wealthy  and  its  per  capita  wealth  small.  Conversely,  a 
nation  may  be  poor  and  its  per  capita  wealth  large.  In 
the  former  case  the  aggregate  wealth  would  be  divided 
among  a  large  population,  while  in  the  latter  case  the 
aggregate  wealth  would  be  divided  among  a  small  popula- 
tion. Aggregate  wealth  remaining  the  same,  per  capita 
wealth  decreases  as  the  population  increases,  or  it  increases 
as  the  population  decreases. 

10.  Increasing  Aggregate  Wealth  and  Diminishing  per 
Capita  Wealth. — We  have  seen  that  it  takes  a  combination 
of  different  agents  to  produce  a  commodity;  seed-corn, 
land,  labor,  and  tools  must  work  together  to  produce  a 
bushel  of  corn.  Productive  capacity  is  increased  by  a 
better  apportionment  of  these  factors.  Prior  to  our  Civil 
War  we  had  a  small  population  in  comparison  with  our 
land  and  natural  resources.  Every  increase  in  population 
was  a  blessing  collectively  and  individually,  because  it 
made  possible  greater  individual  earnings.  After  a  proper 
adjustment  between  the  population  and  resources  is 
reached,  a  further  increase  of  population  tends  to  in- 
crease aggregate  wealth  and  to  diminish  per  capita 
wealth. 

11.  View-Points  in  Autocratic  and  Democratic  Countries. 
—In  a  democracy,  where  the  people  control,  individual 

welfare  and  per  capita  wealth  are  emphasized.  In  an 
autocracy,  where  a  potentate  controls,  national  strength 
and  national  wealth  are  emphasized.  In  an  autocracy 
economic  interest  would  centre  in  theories  of  prosperity 


84  Introduction  to  Economics 

or  in  problems  of  production,  while  in  a  democracy  the 
prevailing  emphasis  falls  on  the  problem  of  distribution. 
The  one  would  say:  "We  must  produce  before  we  distrib- 
ute; there  must  be  something  to  divide  before  we  proceed 
to  a  division;  produce  in  abundance  and  distribution  will 
automatically  take  care  of  itself."  The  other  would  say: 
"The  greatest  incentive  to  produce  is  found  where  there  is 
a  proper  distribution;  great  production  without  adequate 
distribution  would  mean  the  wealth  of  a  few  and  the  misery 
of  a  multitude;  wisely  distribute,  and  adequate  production 
will  be  properly  fostered  and  directed." 

The  above  statements  show  that  for  the  sake  of  clear- 
ness the  word  wealth  should  always  be  modified  by  one 
of  the  following:  Per  capita,  national,  public,  private, 
social. 

12.  Wealth  and  Property. — It  is  necessary  at  this  point 
to  distinguish  between  property  and  wealth.  The  neglect 
of  this  distinction  has  caused  great  confusion,  especially 
in  problems  of  taxation  and  in  statistical  tabulations  of 
our  national  wealth.  Property  is  a  legal  concept;  it  is  a 
title  to  wealth.  A  house  is  an  object  of  wealth;  the  title 
to  a  house  is  property.  A  railroad  is  wealth;  there  may 
be  a  thousand  property  rights  to  this  one  piece  of  wealth. 
Wealth  remains  the  same  whether  property  rights  are  in- 
creased, decreased,  or  destroyed.  Should  the  state  take 
away  the  title  of  individuals  to  land,  our  land  wealth 
would  remain  the  same.  Property,  and  not  wealth,  was 
created  when  Russian  peasants  were  made  subject  to  pur- 
chase and  sale. 

We  must  not  speak  of  legal  instruments — deeds,  fran- 
chises, stock-certificates,  mortgages,  and  other  evidences 
of  ownership — as  wealth.     If  we  speak  of  a  farm  as  wealth 


The  Subject- Matter  of  Economics  85 

and  also  speak  of  the  title  to  it  as  wealth,  we  are  counting 
twice.  If  the  city  imposes  a  tax  on  a  street-railway  and 
in  addition  imposes  a  tax  on  the  stock  or  ownership  of  the 
railway  it  is  double  taxation. 

Inventions,  discoveries,  and  new  scientific  methods  have 
made  additions  to  wealth  wholly  out  of  proportion  to  the 
gains  of  individuals  in  the  form  of  property.  The  effect  of 
improvements  is  to  enable  a  given  amount  of  goods  to  be 
produced  at  a  lower  cost,  or  to  enable  more  goods  to  be 
produced  at  a  given  cost.  Should  an  improvement  enable 
a  business  to  double  its  output  without  additional  cost  the 
community  would  enjoy  greater  abundance  and  lower 
prices.  If  an  improvement  should  double  the  supply  of 
steel  and  cut  the  price  in  two,  there  would  be  no  percepti- 
ble increase  in  property  of  steel-owners,  but  a  great  addi- 
tion to  wealth. 

Property  enables  individuals  to  live  from  the  products 
of  others.  Current  supplies  are  perishable,  therefore  each 
season  must  yield  its  crop  if  society  be  spared  from  want. 
Society  must  continually  produce  these  necessities.  What 
is  true  of  society  in  this  regard  is  not  true  of  the  individual. 
The  individual  may  have  property  in  permanent  assets, 
and,  as  necessity  arises,  exchange  these  for  current  neces- 
sities. Private  ownership  or  property  enables  the  indi- 
vidual to  depend  on  others.  Thus  private  property 
makes  possible  a  leisure  class  (called  "idle  rich"  and  "par- 
asites"). 

13.  Capital  and  Wealth. — Wealth  consists,  as  we  have 
seen,  of  productive  capacity  and  of  the  incomes  which  pro- 
vide the  necessities,  comforts,  and  conveniences  of  life. 
Capital,  on  the  contrary,  is  acquisitive  in  nature.  One's 
capital  expresses  his  purchasing  power  with  respect  to  the 


86  Introduction  to  Economics 

products  of  others.  It  is  thus  a  privately  owned  valuable 
right.  There  is  much  capital  that  is  not  wealth  at  all. 
When  Queen  Elizabeth  empowered  one  with  the  legal  privi- 
lege of  monopolizing  trade  in  cards,  that  right  was  not 
wealth,  although  it  became  a  great  means  of  private  acqui- 
sition or  capital.  Capital  may  take  the  form  of  legal  ad- 
vantage, monopoly  power,  a  franchise,  or  mere  good-will. 

Generally  speaking,  however,  capital  is  the  value  of  a 
property  right  to  an  item  of  wealth.  A  horse  is  an  item  of 
wealth.  If  horses  are  plentiful  and  cheap,  the  owner  of 
a  horse  has  a  small  capital  or  value  right.  When  the  Euro- 
pean war  creates  a  large  demand  for  horses,  thus  making 
them  scarce  and  high-priced,  the  owner  finds  that  his  capi- 
tal is  increased.  Capital  and  scarcity  are  inseparably  con- 
nected. The  capital  of  certain  individuals  may  increase 
while  social  and  also  per  capita  wealth  decrease.  Be- 
tween 1900  and  191 5  there  was  but  little  increase  in  the 
number  of  improved  acres  in  farms,  but  the  demand  for 
land  products  was  greatly  increased,  due  to  the  vast  in- 
crease of  population.  There  was  a  decrease  in  the  acreage 
of  land  per  capita,  and  at  the  same  time  an  increase  in  the 
capital  in  land. 

14.  The  Money  Expression  of  Wealth. — It  is  now  evi- 
dent that  a  sum  of  capital  values  may  be  misleading  as  an 
index  of  well-being  or  as  an  expression  of  national  or  per 
capita  wealth.  The  estimate  of  our  national  wealth  is 
made  in  dollars.  This  is  faulty  for  two  reasons:  first, 
should  we  assume  no  change  whatsoever  in  the  amount  of 
national  wealth,  yet  it  would  be  expressed  as  larger  or 
smaller  should  the  purchasing  power  of  the  dollar  go  down 
or  up;  second,  there  is  much  wealth  which  is  not  expressed 
in  terms  of  money.     The  purchasing  power  of  a  dollar  is 


The  Subject- Matter  of  Economics  87 

less  to-day  than  it  has  been  at  any  time  in  many  years. 
Should  we  assume  that  the  per  capita  wealth  remains  con- 
stant, yet  a  decline  in  the  exchange  power  of  money  will 
show  a  great  increase  in  the  money  worth  of  the  per  capita 
wealth. 

The  money  expression  of  our  wealth  gives  no  adequate 
picture  of  well-being.  It  expresses  nothing  as  to  free 
goods.  Much  of  our  public  property  has  no  money  esti- 
mate; our  rivers  and  harbors  are  exemplary  of  this. 

15.  Economics  is  concerned  with  the  utilization  of 
wealth  and  labor  to  the  end  of  gratifying  desires.  This 
makes  of  it  a  human  science,  and  as  such  its  subject-matter 
is  the  basis  of  much  controversy.  It  is  closely  related  to 
political,  ethical,  and  historical  considerations.  Both  for 
the  purposes  of  illustration  and  for  the  application  of  prin- 
ciples the  economist  frequently  takes  excursions  into  these 
kindred  fields  of  thought.  The  more  strictly,  however, 
kindred  branches  are  separated,  the  better  it  will  be  for 
each  and  all.  "The  easiest  and  surest  way  to  increase 
our  knowledge  of  any  subject  is  to  isolate  it,  and  investi- 
gate it  to  the  strict  exclusion  for  the  time  of  all  other 
subjects." 

Some  of  the  laws  of  economics  are  applicable  to  all  forms 
of  social  organization.  They  apply  alike  to  the  isolated 
individual  like  Crusoe,  to  the  cave-dweller,  to  the  tribe  of 
savage  huntsmen,  to  the  self-sufficing  family,  to  the  great 
and  prosperous  nation.  They  apply  in  backward  commu- 
nities, where  trade  is  by  barter  (barter  being  a  trade  of 
goods  or  services  for  other  goods  or  services,  i.  e.,  trading 
without  the  use  of  money).  They  apply  with  equal  force 
in  a  capitalistic  community  with  an  intricate  system  of 
currency. 


88  Introduction  to  Economics 

In  treating  of  the  acquisition  and  utilization  of  wealth 
economics  must  study  nefarious  practices,  by  which  un- 
scrupulous individuals  acquire  wealth.  It  must  include  a 
consideration  of  such  predatory  agencies  as  the  outfit  of 
the  robber  or  the  roulette-wheel  of  the  gamester.  Eco- 
nomics also  studies  the  most  noble  and  edifying  activities 
of  men  so  far  as  these  are  related  to  the  production,  main- 
tenance, and  utilization  of  wealth.  This  science  inquires 
into  the  cause  and  effect  of  different  kinds  of  wealth  and  of 
different  lines  of  business.  It  serves  to  work  into  the  un- 
derstanding of  men  a  body  of  sound  principles  from  which 
may  be  deduced  practical  rules  and  precepts  for  the  safe 
guidance  of  human  conduct  to  the  end  of  social  and  indi- 
vidual well-being. 

At  the  expense  of  repetition,  let  it  be  added  that  econom- 
ics is  a  human  science,  and  it  is  broad  enough  to  include 
all  the  wealth-getting  and  wealth-using  activities  of  man 
in  whatever  state  of  organization  he  may  be  found.  The 
student  must  be  on  his  guard  once  for  all  against  such  defi- 
nitions of  this  science  as  would  artificially  narrow  the 
thought  to  money  price  transactions.  Buying  and  selling, 
and  legal  or  contractual  obligations  which  are  effected  by 
the  use  of  money  (price  transactions)  form  an  essential 
part,  but  not  the  whole  of  economics. 

16.  Economic  Laws  and  Social  Institutions.— We  must 
distinguish  natural  economic  laws  from  man-made  insti- 
tutions. Scientific  principles  may  determine  legislation, 
but  legislation  cannot  determine  scientific  principles.  In- 
stitutions are  man-made;  they  may  be  created,  modified,  or 
destroyed  by  a  majority  vote.  Institutions  may  be  formed 
in  accord  with  economic  principles  that  promote  well- 
being,  and  as  such  serve  to  the  greatest  social  good.     On 


The  Subject- Matter  of  Economics  89 

the  other  hand,  they  may  be  in  accord  with  economic  laws 
and  work  positive  harm.  A  law  only  states  what  will  hap- 
pen under  certain  conditions;  it  is  not  a  part  of  the  law  to 
state  whether  the  consequence  will  be  good  or  bad.  The 
competitive  system,  which  embodies  private  property  and 
exchange,  is  an  institution.  The  majority  think  that  it  is 
based  on  such  economic  principles  as  will  direct  the  work- 
ings of  this  institution  to  the  end  of  the  greatest  good;  the 
minority  think  differently.  Who  is  right?  To  answer 
this  involves  an  economic  problem  which  calls  for  a  clear 
conception  of  the  nature  and  workings  of  economic  laws. 
The  answer  to  this  question  requires  investigation  into 
social  history  and  an  analysis  of  social  experience  in  order 
that  we  may  learn  the  truth  regarding  the  laws  upon  which 
the  competitive  system  is  based.  To  define  economic  laws 
in  terms  of  the  competitive  system  is  to  beg  the  question. 
Or  to  define  economics  as  the  science  of  wealth,  and  then 
define  wealth  in  terms  of  the  competitive  system  is  in  the 
beginning  to  beg  the  question.  Such  a  procedure  prepares 
the  way  not  for  a  study  of  economic  laws  but  for  a  mere 
elaboration  on  the  competitive  system. 

17.  The  goal  of  public  policy  is  human  welfare.  The 
word  policy  implies  the  recognition  of  some  end  to  be 
accomplished  and  the  definite  shaping  of  our  course  toward 
that  end.  The  old  truism,  "We  can  command  laws  only 
by  obeying  them,"  teaches  us  that  we  must  shape  our 
course  in  strict  obedience  to  economic  laws  if  we  attain 
the  goal  of  our  economic  policy.  We  must  comprehend 
law  before  we  can  shape  our  course  in  obedience  to  law; 
the  shaping  of  a  course  takes  the  form  of  an  institution, 
therefore  the  study  of  economic  law  is  antecedent  to  a 
sound  conclusion  regarding  the  merits  of  institutions. 


90  Introduction  to  Economics 

18.  Changes  in  Economics. — Economics  is  to  be  sharply- 
distinguished  from  economy  or  economic  life.  Economic 
life  refers  to  the  nature  of  the  customs,  institutions,  and 
activities  of  a  people  in  getting  a  living.  We  say,  for  in- 
stance, that  the  Civil  War  brought  about  a  great  change 
in  the  economic  life  of  the  South.  Formerly  the  plantation- 
owner  used  slave-labor  in  the  production  of  things  largely 
for  his  own  use.  Clothing,  shoes,  and  farm-utensils  were 
produced  in  small  shops  on  the  plantation.  To-day  he 
pays  wages  for  labor,  sells  his  products  to  large  domestic 
or  foreign  markets  and  acquires  his  clothing,  shoes,  and 
farm-utensils  indirectly  from  a  giant  corporation.  This 
describes  a  change  in  economic  life.  Economic  life  may 
change  while  economic  laws  remain  the  same.  As  a  gov- 
ernment may  change  from  one  form  to  another,  although 
the  principles  of  government  remain  the  same,  so  economics 
may  change  while  economic  laws  remain  the  same.  Eco- 
nomics is  designed  to  explain  economic  life,  and  as  eco- 
nomic life  changes,  the  science  which  explains  it  must 
change  in  content  and  emphasis. 

19.  Economics  and  Political  Reform. — Abundant  natural 
resources  in  the  form  of  timber,  iron,  coal,  and  harbors, 
together  with  a  hardy  people  are  no  guarantee  against 
poverty.  Science  must  unite  with  labor  in  order  that  re- 
sources may  yield  their  benefits.  Poverty  is  found  in  the 
midst  of  potential  abundance  as  well  as  in  the  midst  of 
scanty  resources.  In  either  case  poverty  is  due  to  mal- 
adjustment— there  are  too  many  mouths  to  be  fed  in  pro- 
portion to  the  available  supply  of  food,  or  there  may  be 
enough  food,  but  it  may  be  owned  by  the  few  to  the  exclu- 
sion of  the  many.  In  any  such  cases  of  maladjustment, 
social  conflict  gives  rise  to  problems  for  the  lawmaker. 


The  Subject- Matter  of  Economics  91 

What  law  is  depends  largely  upon  existing  economic  con- 
ditions. Social  relations  are  constantly  growing  more 
complex.  Factories  are  selling  their  wares  for  delivery  a 
year  hence  even  before  they  are  produced;  and  in  turn 
these  factories  are  contracting  for  the  future  delivery  of 
raw  materials  with  which  to  make  the  same  wares.  Should 
there  be  default  of  contract  anywhere  along  the  line,  fu- 
ture sales  would  be  rendered  impossible.  The  credit  basis 
upon  which  modern  business  is  financed  makes  it  impera- 
tive that  men  meet  their  obligations.  Instances  might  be 
multiplied  to  demonstrate  the  need  of  legal  enforcement 
of  contracts. 

The  growth  of  transportation  facilities  and  the  concen- 
tration of  industries  tend  to  destroy  community  isolation 
and  to  unite  the  interests  of  the  people,  hence  there  is  need 
of  uniform  legislation.  Although  this  unity  of  interests 
demands  unity  in  legislation,  our  political  organization  is 
such  as  to  cause  a  diversity  in  law.  As  each  State  has  been 
added  to  the  Union  it  has  added  a  legislature  and  a  court 
of  last  resort  to  the  oversupply  of  such  bodies.  States, 
as  well  as  individuals,  have  conflicting  interests,  and  they 
vie  with  one  another  for  advantages.  Each  State  is 
anxious  to  attract  business,  and  so  is  reluctant  to  pass 
compensation  acts,  child-labor  laws  or  other  remedial 
legislation,  lest  capital  seek  the  State  with  fewer  restric- 
tions. One  State,  for  instance,  by  legalizing  concentra- 
tion and  restraints  of  trade,  has  attracted  large  corpora- 
tions. "That  State  profits  to  the  extent  of  over  $3,000,000 
per  annum  because  of  its  pioneer  position  in  passing  liberal 
corporation  laws."  Other  States,  seeing  these  advantages, 
are  forced  to  similar  measures  and  so  interstate  competi- 
tion only  too  frequently  takes  the  form  of  lax  legislation. 


92  Introduction  to  Economics 

The  statesman  acquainted  With  the  principles  of  eco- 
nomics knows  that  one  state  does  not  succeed  by  impov- 
erishing another.  They  are  not  economists  who  wish  to 
extend  American  trade  by  limiting  or  crippling  the  trade 
of  England.  To  day  every  Industry  is  producing  for  the 
market.  Every  good  so  produced  is  from  the  moment  of 
its  existence  a  demand  for  another  product.  Cripple  a 
nation  or  an  industry  and  you  limit  the  market  for  your 
product.  If  only  for  selfish  reasons,  we  should  assist 
Other  states  or  nations,  and  if  our  legislators  were  better 
trained  in  economic  principles,  such  unwise  methods  of 
competing  would  not  exist. 

In  addition,  the  moral  level  of  competition  is  usually 
set  by  the  competitor  of  lowest  standing.  The  manufac- 
turer who  pays  low  wages,  maintains  poor  conditions  and 
exacts  long  hours,  can  force  other  employers  to  the  same 
level  of  conduct.  His  lower  costs  would  enable  him  to 
reduce  his  prices  and  take  the  market.  Other  manufac- 
turers must  conform  to  his  low  standard,  or  the  state  must 
maintain  a  higher  one.  Statutes  dealing  with  conditions 
of  factories,  the  employment  of  women  and  children,  the 
maintenance  of  safety-appliances  are  all  instances  of  laws 
attempting  to  overcome  the  evils  of  competition.  In  fact, 
legislation,  for  the  most  part,  is  on  strictly  economic  sub- 
jects, such  as  the  tariff,  banking,  labor  troubles,  and  meth- 
ods of  competition.1     True  statesmanship  would  seek   to 

1  \n  enumeration  of  the  essential  laws  of  the  lasl  pre  war  administration 
lend  emphasis  to  this  statement.  The  chief  acts  passed  during  thai  admin- 
istration were: 

(«)  The  federal  Reserve  Law. 

(b)  The  Eight-Hour  Law. 

(c)  The  Rural  Credits  Law. 

(d)  The  Child  Labor  Law. 

(e)  The  Workmen's  Compensation  Law. 


The  Subject- Matter  of  Economics  93 

preserve  the  benefits  of  competition  and  to  destroy  its 
evils;  it  would  raise  the  plane  of  competition  without  re- 
stricting it.  Therefore  lawmakers  are  in  duty  bound  to 
have  a  grasp  of  economic  principles.  Voters  cannot  be 
neutral  on  questions  of  economic  conduct;  to  vote  in  the 
negative  is  as  positive  in  result  as  to  vote  affirmatively. 
The  college  graduate  who  has  neglected  the  principles  upon 
which  legislation  is  based  exercises  the  ballot  no  more  in- 
telligently than  the  illiterate.  Since  legislation  is  based 
so  largely  upon  these  principles,  it  is  clear  that  intelligent 
voting  requires  some  knowledge  of  economics.1 

20.  Economics  and  Business. — In  a  narrow  sense  eco- 
nomics is  the  science  of  which  business  is  the  art.  Eco- 
nomics is  therefore  important  for  the  business  man  to  the 
extent  that  a  practitioner  should  understand  the  principles 
of  which  he  is  making  constant  application.  The  study  of 
economics  imparts,  moreover,  a  habit  of  thought  and  a 
familiarity  with  concepts  invaluable  to  the  man  in  big 
business,  who  to  be  successful  must  have  a  deep  compre- 
hension of  principles  involving  a  network  of  mutually  de- 
pendent phenomena.  The  great  generals  of  industry  are 
such,  for  the  most  part,  because  their  deep  insight  into 
mutually  dependent  phenomena  gives  them  foresight  and 

(/)  A  Law  Creating  a  Tariff  Commission. 

(g)  The  Good  Roads  Law. 

(Ji)  The  Income  Tax  Law  and  the  Inheritance  Tax  Law. 

(i)  The  Agricultural  Extension  Law. 

(/')  The  Alaskan  Railway  Law. 

(k)  The  Federal  Trade  Commission  Law. 

(/)  The  Grain  Anti-Gambling  Law. 

(m)  The  Safely-at-Sea  Law. 

(«)  The  Cotton  Futures  Law. 

(o)  The  Clayton  Anti-Trust  Law. 

1  See  H.  C.  Adams's  Relation  of  States  to  Industrial  Activity,  pp.  39-47. 


94  Introduction  to  Economics 

thereby  enables  them  to  grasp  developing  opportunities. 
The  greatest  principle  in  economics  is  that  of  proportion- 
ality—the principle  of  the  adjustment  and  the  interaction 
of  mutually  dependent  phenomena.  As  the  market  is  ex- 
tending and  businesses  are  concentrating  into  large  units, 
complex  and  far-reaching  problems  cannot  but  develop. 
The  solution  of  these  requires  a  profound  knowledge  of 
economic  principles.  Some  of  the  most  notable  advertis- 
ing campaigns  in  recent  years  have  been  carried  through 
on  strictly  economic  grounds.  Some  of  the  most  careful 
students  of  economics  are  men  in  the  field  of  merchandising. 
So-called  middle-men  must  conform  their  conduct  to  the 
principles  of  economics.  Directors  of  large  businesses  and 
small  are  constantly  applying  these  principles  and  should 
understand  them. 

But  to  say  that  economics  is  important  for  the  business 
man  does  not  say  that  it  teaches  him  how  to  become  rich. 
Some  of  the  most  ridiculous  economic  theories  are  adhered 
to  by  prominent  financiers.  These  men  are  masters  of 
detail  within  a  limited  field.  There  are  successful  men  in 
phases  of  banking  who  know  nothing  of  the  principles  of 
money  and  who  have  never  read  the  Federal  Reserve  Act. 
One  might  have  years  of  training  and  successful  experience 
in  particular  phases  of  banking,  and  yet  be  as  incapable  as 
a  teamster  of  devising  a  monetary  policy  for  the  Philip- 
pines. But  as  the  economy  of  self-sufficiency  is  giving 
way  to  the  economy  of  interdependence,  even  the  specialist 
is  compelled  to  view  his  task  in  its  broader  economic 
aspects.  A  treatise  on  economics  presents  principles  in 
their  relationship  to  each  other.  The  problems  of  the 
business  man  differ  with  respect  to  time  and  place;  with 
respect  to  changes  in  related  businesses;  with  respect  to 


The  Subject- Blatter  of  Economics  95 

different  proportions  of  ingredients  in  the  different  prob- 
lems. The  business  man  finds  no  prescriptions  in  eco- 
nomics for  each  case,  but  from  economics  he  learns  how  to 
trace  causes  to  their  effects  in  the  mutually  dependent 
phenomena  of  industry. 

21.  Exercises.— i.  What  is  the  difference  between  cur- 
rent supplies  and  productive  capacity  ? 

2.  How  may  destruction  be  a  real  benefit  to  society? 
Cite  three  examples  of  this. 

3.  Define:  social  wealth,  private  wealth,  public  wealth, 
per  capita  wealth. 

4.  Are  wealth  and  property  co-extensive  ?  Give  two 
examples  to  illustrate  your  answer. 

5.  Wealth  is  any  material  good  which  satisfies  a  desire 
of  man,  and  which  is  not  gratuitous.  It  is  used  as  a  col- 
lective term,  for  the  general  conception  of  such  goods,  and, 
when  it  describes  the  subject  or  aim  of  political  economy, 
it  carries  with  it  the  notion  of  abundance.  Criticise  and 
correct  this  definition.  Do  you  include  in  your  definition 
the  following:  Honesty,  health,  skill,  "the  moral,  intellec- 
tual, and  physical  natures"  of  the  people,  a  patent  right, 
a  copyright,  a  bill  of  exchange,  the  voice  of  a  singer,  a 
good  harbor,  climate,  and  sunlight?     (Sumner.) 

6.  If  a  census  were  taken  of  the  wealth  of  the  country, 
ought  the  owners  of  land  to  return  it  at  its  market  value  ? 
Is  the  land  a  part  of  the  national  wealth?  Ought  the 
owners  of  government  bonds  to  include  them  in  the  return  ? 
If  they  did  so,  and  if  the  returns  were  added  up,  the  na- 
tional debt  would  be  counted  into  the  sum  of  the  national 
wealth.     Would  that  be  right  ? 

If  A  sells  to  B  a  bale  of  cotton  for  $500  and  B  gives  a 
promissory  note  for  it,  ought  B  to  return  the  cotton  and 
A  the  note  ?  If  A  has  a  certificate  of  stock  in  a  railroad, 
ought  the  railroad  officers  to  return  the  railroad,  and 
ought  A  to  return  the  stock  ?     (Sumner.) 

7.  Are  the  following  to  be  included  in  wealth:  (1)  the 


96  Introduction  to  Economics 

original  powers  of  the  laborer;  (2)  his  acquired  powers;  (3) 
the  original  properties  of  the  soil;  (4)  improvements  on 
land;  (5)  credit? 

8.  What  is  meant  by  the  term  "economic  policy"? 
What  bearing  may  questions  of  economic  policy  have  on 
the  institution  of  private  property  ? 

9.  Why  is  it  necessary  to  distinguish  between  economic 
laws  and  economic  conduct  ?  In  what  way  does  economics 
change  ? 

10.  How  does  a  knowledge  of  economics  assist  the  legis- 
lator ?  the  business  man  ? 

11.  Criticise:  "A  good  climate  is  not  wealth  because  all 
are  equal  in  the  enjoyment  of  it."  Does  this  agree  with 
President's  Hadley's  statement,  "The  true  basis  for  an 
estimate  of  a  nation's  wealth  is  to  be  found  in  the 
enjoyments  of  its  members"?  (Economics,  p.  4.)  Does 
this  statement  conform  to  private,  public,  or  social 
wealth  ? 

12.  Criticise:  F.  A.  Walker  said:  "The  Proclamation  of 
Emancipation,  in  the  United  States  and  Russia,  annihi- 
lated a  vast  mass  of  wealth." 

Do  you  agree  with  David  Ricardo?  He  said:  "It  is 
through  confounding  the  ideas  of  value  and  wealth,  or 
riches,  that  it  has  been  asserted,  that  by  diminishing  the 
quantity  of  commodities,  that  is  to  say,  of  the  necessities, 
conveniences,  and  enjoyments  of  human  life,  riches  may 
be  increased." 

13.  We  associate  efficiency  with  wealth  and  drunken- 
ness with  poverty.  Should  we  classify  whiskey,  the  means 
of  drunkenness,  as  wealth  ? 

14.  Frost  is  not  wealth  but  a  destroyer  of  wealth,  yet  it 
would  be  wealth  if  privately  appropriated,  because  one 
could  add  to  the  value  of  his  own  wealth  by  nipping  his 
neighbor's  crop  in  the  bud.  Point  out  the  error,  if  there 
be  any,  in  this  statement. 

15.  The  waters  near  our  coasts  are  great  sources  of  food. 
They  are  not,  for  the  most  part,  privately  owned,  yet  they 


T/ie  Subject- Matter  of  Economics  97 

are  more  important  to  the  nation  than  a  large  part  of  the 
land  area.     Are  they  wealth?    If  so,  what  kind? 

16.  Should  you  deny  the  concept  of  social  wealth,  could 
you  account  for  the  economic  power  of  ancient  Egypt,  or 
of  the  United  States? 


CHAPTER   VI 
DESIRE,  DESIRABILITY 

i.  Desires  as  motives.  2.  Desires  are  recurring.  3.  Intelligence,  desire, 
effort.  4.  Desires  for  near  and  remote  possession.  5.  Standards  of  con- 
sumption. 6.  Harmony  in  consumption.  7.  Desires  and  productive  capac- 
ity. 8.  "The  cost  of  high  living."  9.  Desires  and  ultimate  wealth.  10. 
Desires  and  association  of  ideas,  n.  Altruistic  desires.  12.  Desires  and 
wants.  13.  Necessities.  14.  Repressibility  of  desires.  15.  The  standard  of 
life.  16.  The  notion  of  scarcity.  17.  Desirability.  18.  Utility.  19.  Dimin- 
ishing desirability.  20.  The  equal  desirabilities  of  units.  21.  Total  desira- 
bility. 22.  Graphic  illustration  of  equal  desirabilities.  23.  Graphic  illus- 
tration of  desirabilities  at  different  times.  24.  Marginal  desirability.  25. 
The  tendency  to  equality  of  marginal  desirabilities.  26.  Graphic  illustra- 
tion of  this  equality.  27.  Examples  of  marginal  desirability.  28.  Exer- 
cises. 

i.  Desires  as  Motives. — The  movement  of  the  blood  in 
the  body,  of  the  ocean  tides,  of  the  winds,  and  of  the  planets 
sets  the  scientist  the  task  of  accounting  for  these  move- 
ments. Likewise  the  efforts  of  man  in  the  shop,  store, 
market-place,  on  the  farm,  or  in  transportation,  set  the  econ- 
omist the  task  of  accounting  for  these  activities.  Search 
where  he  may,  he  will  find  but  one  motive  for  all  economic 
endeavor,  and  that  is,  human  desires  for  the  necessities, 
comforts,  luxuries,  and  conveniences  of  life.  These  may  be 
desired  either  for  one's  consumption  or  for  the  prestige 
which  goes  with  ownership,  or  yet  for  purposes  wholly 
altruistic. 

The  simplest  form  of  desire,  like  that  of  the  savage, 
child,  or  animal,  is  for  food  and  the  other  elemental  require- 
ments. The  craving  for  food  stirs  men  up  to  the  effort 
to  secure  it.  That  is  the  primary  cause  of  productive 
labor.  As  the  individual's  intelligence  broadens,  he  comes 
to  attribute  value  not  only  to  the  immediate  objects  of 

98 


Desire,  Desirability  99 

consumption,  but  also  to  the  indirect  means  of  producing 
these.  The  individual's  order  of  thought  in  attributing 
value  to  things  is  from  finished  goods  ready  for  consump- 
tion back  to  the  direct  agencies  of  producing  these  and  on 
back  to  the  more  remote  and  indirect  agencies.  Because 
we  recognize  the  utility  of  the  apple,  reason  teaches  us  to 
prize  the  desirability  of  the  tree  which  produced  it,  and 
further  to  attribute  value  to  the  land,  labor,  and  other 
agencies  back  of  the  tree. 

2.  Desires  Are  Recurring. — Gratification  at  best  is  only 
temporary.  We  do  to-day's  reading,  eating,  and  exercis- 
ing to-day.  But  to-day's  eating  will  not  gratify  to-mor- 
row's desire  for  food.  In  order  that  one  may  get  the  great- 
est enjoyment  through  time,  what  is  more,  in  order  that 
one  may  live,  goods  of  present,  direct  use  and  services 
must  be  meted  out  through  time.  These  goods  of  direct 
use  and  services  are  to  be  thought  of,  not  as  a  fund  or 
accumulation,  but  as  a  flow.  The  dwelling-house  is  one 
thing  and  the  shelter  (service)  it  affords  through  time  is 
another.  The  shelter  of  the  house,  the  ride  which  the 
automobile  affords,  the  protection  which  clothing  insures, 
the  thousand  and  one  benefits  from  other  productive 
agents,  constitute  a  flow. 

3.  Intelligence,  Desire,  Effort. — Desires  show  progress  in 
intelligence.  Desires  imply  a  knowledge  of  the  thing  de- 
sired. If  one  says,  "I  desire,"  the  question  which  nat- 
urally follows  is:  "What?  Do  you  desire  a  hat,  a  suit  of 
clothes,  a  pencil,  a  glass  of  orangeade?"  You  have  no 
desire  for  a  glass  of  orangeade  unless  you  know  what 
orangeade  is.  Benjamin  Franklin  was  never  imbued  with 
a  desire  for  a  Ford  automobile.  When  there  is  no  knowl- 
edge there  is  no  desire  and  desires  increase  as  knowledge 


100  Introduction  to  Economics 

widens.  Knowledge  gives  birth  to  desire  and  desire  points 
out  a  path  for  will.  Why  will  one  risk  his  life  further  to 
save  a  drowning  child  than  to  save  a  drowning  dog,  or 
why  will  one  work  harder  for  a  thousand  dollars  than  for 
ten  dollars?  Strong  desires  and  great  effort,  and  weak 
desires  and  weak  effort  go  together. 

4.  Desires  for  Near  and  Remote  Possession. — It  is  a 
general  rule  that  the  near  occasions  a  stronger  desire  than 
the  remote.  The  child  prefers  one  box  of  candy  to-day  to 
two  boxes  a  year  hence.  The  normal  person  desires  more 
intensively  the  present  possession  of  wealth  or  the  present 
direct  uses  of  goods  than  the  future  possession  or  the 
future  uses  of  goods.  The  majority  of  the  economists 
place  emphasis  on  the  desire  for  present  consumption  over 
future  consumption.  I  wish  to  emphasize  that  the  desire 
for  present  possession  of  wealth  over  future  possession  of 
wealth  is  far  more  significant.  This  point  will  occupy  us 
at  length  when  we  come  to  consider  the  theory  of  interest. 
It  is  enough  to  say  that  the  greater  part  of  large  credit 
transactions,  of  durable  investments  and  of  permanent 
improvements  concern  most  deeply  the  direction  of  social 
wealth. 

But  while  desire  is  stronger  for  present  consumption  or 
for  present  possession,  it  is  common  knowledge  that  as 
intelligence  broadens  our  present  desire  becomes  stronger 
for  future  goods.  The  ignorant  man  is  not  provident;  he 
does  not  save  for  the  future.  The  intelligent  person,  how- 
ever, cannot  but  realize  the  need  of  providing  for  the 
future.  This  fact  causes  him  to  desire  durative  goods, 
that  is,  durable  agents  which  will  yield  the  means  of  grati- 
fying desires  in  the  future.  If  there  were  no  desire  for 
future   incomes,   man   would   not   ascribe   importance   to 


Desire,  Desirability  101 

durable  productive  agents.  While  the  desire  for  consump- 
tion is  back  of  the  motive  for  possession,  yet  the  determi- 
nation to  possess  is  the  force  which  shapes  industry. 

5.  Standards  of  Consumption. — Increasing  intelligence 
causes  desires  for  goods  and  services  that  are  superior  in 
quality,  and  the  consumption  of  such  goods  and  services 
still  further  increases  the  standard  of  desire.  A  Tennessee 
mountaineer  told  the  writer  that  a  summer's  stay  in  New 
York  City  had  changed  his  desire  for  yarn  socks,  hoe-cake, 
and  moonshine.  The  wealthy  who  suffer  a  sudden  reverse 
of  fortune  find  it  hard  to  readjust  their  standards.  In- 
creasing intelligence,  furthermore,  develops  a  desire  for  a 
great  variety  of  goods.  Thus  increasing  desires  call  for 
improvement  in  the  quality  and  variety  of  goods.  They 
call  for  better  clothing  in  a  greater  variety,  for  better  food 
adapted  to  a  wider  range  of  taste,  and  for  superior  amuse- 
ments in  a  more  liberal  assortment. 

6.  Harmony  in  Consumption. — Then,  too,  increasing  in- 
telligence gives  rise  to  the  desire  for  harmony  in  the  means 
of  consumption.  Harmony  in  dress,  in  the  different  items 
of  the  dinner,  in  house  decoration,  is  demanded  by  the 
more  intelligent.  A  thoughtful  husband  will  not  purchase 
his  gifted  wife  an  expensive  hat  unless  he  is  prepared  to 
foot  the  bill  for  the  other  articles  of  apparel  to  harmonize 
with  it.  The  possession  of  one  thing  stimulates  the  desire 
for  other  things,  thereby  extending  the  motive  for  further 
effort.  Man  is  by  nature  a  social  being;  as  such  most  of 
his  economic  desires  are  the  outgrowth  of  his  social  life. 
In  the  language  of  W.  E.  Hearn,  "Man  is  imitative,  and 
so  seeks  to  have  what  his  neighbor  enjoys;  he  is  vain,  and 
so  desires  to  display  himself  and  his  possessions  with 
advantage  before  his  fellows;  he  loves  superiority,  and  so 

LIBRARY 
UNIVERSITY  OF  CALIFORNIA 

RIVERSIDE 


102  Introduction  to  Economics 

seeks  to  show  something  that  others  have  not;  he  dreads 
inferiority,  and  so  seeks  to  possess  what  others  also  possess." 

7.  Desires  and  Productive  Capacity. — Desires  as  mo- 
tives may  be  in  accord  with  or  out  of  accord  with  produc- 
tive capacity.  As  above  pointed  out,  the  motive  for  pro- 
duction is  desire.  We  produce  what  we  want;  we  expend 
energy  on  the  production  of  nothing  else.  If  you  wish  the 
clew  to  the  economic  production  of  the  people,  you  have 
but  to  determine  what  the  people  want.  Industry  is  shaped 
around  and  conformed  to  the  desires  of  the  people.  De- 
sires create  demand  for  goods  and  that  which  the  people 
demand  is  what  the  factories,  farms,  and  other  industries 
must  produce.  Do  the  people  desire  articles  that  are 
rare,  choice  wines  or  scarce  materials — things  that  nature 
has  little  capacity  for  producing  ?  If  so,  little  can  be  pro- 
duced and  nature  can  support  but  a  small  population. 
Conversely,  if  a  cheap  and  nutritive  food,  like  rice  or  pota- 
toes, is  desired,  abundance  can  be  produced  and  a  large 
population  can  be  supported  with  plenty. 

The  desire  for  a  variety  of  goods  and  services  causes  a 
varied  production  in  society.  What  is  more,  a  varied  pro- 
duction creates  a  larger  abundance  of  goods.  When  few 
goods  are  produced  many  productive  agencies  lie  idle.  If 
we  produce  only  cereals,  garden-fruits,  and  vegetables, 
the  cranberry-swamps  are  not  utilized.  The  same  crop 
wall  not  grow  on  all  kinds  of  land.  Land  good  for  wheat 
may  not  be  good  for  oranges.  A  variety  of  crops  must  be 
grown  if  the  great  variety  of  soils  be  utilized.  Further- 
more, it  is  unwise  to  plant  the  same  field  to  one  crop  year 
after  year.  The  scientific  rotation  of  crops  keeps  the 
land  fertile.  Thus  we  must  have  a  variety  of  crops  in 
order  to  utilize  the  different  qualities  of  land,  and  a  rota- 


Desire,  Desirability  103 

tion  of  crops  on  the  same  field  in  order  to  secure  the  proper 
utilization  of  the  soil. 

The  different  agencies  of  our  productive  capacity  must 
be  utilized  in  order  that  we  may  employ  a  variety  of  labor 
and  managerial  talent.  When  industry  affords  opportuni- 
ties to  the  different  varieties  of  productive  labor  and  tal 
ent,  the  better  it  is  for  each  and  all.  It  is  waste  to  have  a 
part  of  the  productive  energy  idle.  A  varied  production, 
moreover,  educates  the  people  with  respect  to  the  co- 
operative advantages  of  numerous  industries  working  to- 
gether. It  shows  the  mutual  benefits  to  be  derived  from 
the  interrelationship  of  industries,  from  a  division  of  labor 
and  specialization.  A  varied  production  is  conducive  to 
the  development  of  inventive  genius,  thus  furthering  pro- 
ductive capacity  through  new  industrial  processes  and  a 
higher  utilization  of  human  skill  and  resources.  Because 
varied  desires  cause  variety  in  production,  we  are  furnished 
with  the  secret  of  the  complexity  of  modern  productive 
processes. 

8.  "  The  Cost  of  High  Living."— The  cost  of  high  liv- 
ing is  a  coined  phrase  which  expresses  the  theory  that  the 
present  high  level  of  prices  is  due  to  the  fact  that  we  come 
to  desire  those  goods  for  which  we  have  little  productive 
capacity.  If  desires  are  largely  directed  by  the  love  of 
ostentation;  if  our  energies  are  turned  from  the  cheap  and 
abundant  to  the  rare  and  exclusive,  fewer  necessities  are 
produced  and  prices  are  raised.  There  is  much  truth  in 
this  theory  in  a  society  where  wealth  rather  than  brains 
set  the  style.  The  love  of  ostentation  finds  gratification 
in  the  consumption  of  only  those  goods  which  are  beyond 
the  means  of  the  average  person.  It  takes  much  wealth 
to  buy  diamonds  and  other  objects  of  exclusiveness.     The 


104  Introduction  to  Economics 

rich  too  often  refuse  to  associate  with  those  who  are  not 
properly  trade-marked  with  the  required  symbols.  But 
the  possessors  of  wealth  are  highly  regarded  and  the  poor 
desire  their  association.  To  enjoy  this  association  the 
poor  must  buy  jewels  when  they  should  buy  bread,  and 
automobiles  when  they  should  buy  work-animals.  To  the 
extent  that  production  is  given  to  luxuries  it  is  denied 
to  necessities.  This  causes  necessities  to  be  scarce  and 
high-priced. 

9.  Desires  and  Ultimate  Wealth. — The  kind  of  goods 
desired  largely  bespeaks  the  ultimate  wealth  of  a  society  or 
individual  in  yet  another  way.  Is  one's  desire  for  beer  or 
music,  for  a  big  dinner  or  a  good  book,  for  tobacco  or  a 
painting,  for  the  temporary  means  of  present  gratification 
or  for  the  durable  means  of  permanent  gratification  ? 
The  glass  of  beer  can  be  enjoyed  by  only  one  and  the 
music  by  many;  the  big  dinner  is  consumed  once  for  all, 
but  the  book  can  be  read  in  turn  by  any  number;  the  to- 
bacco goes  up  in  smoke,  while  the  painting  remains  a 
source  of  gratification  for  the  lovers  of  art.  The  same  pro- 
ductive energy  back  of  the  temporary  means  of  gratifica- 
tion would,  in  the  end,  yield  far  more  enjoyment  if  turned 
to  the  more  durable  means  of  gratification. 

Again,  do  we  desire  to  use  the  music,  the  book,  and  the 
painting  in  private,  or  are  we  willing  to  share  the  use  of 
these  with  others?  The  private  use  of  these  is  denied  to 
the  many,  but  a  thousand  may  enjoy  the  same  open-air 
concert,  or  the  same  book  in  the  public  library,  or  the 
same  painting  in  the  public  art  collection.  This  suggests 
certain  difficulties  not  in  the  present  order  of  discussion. 
However,  under  existing  conditions  we  do  share  many  of 
these  goods  in  common.     Of  course,  art  galleries,  libraries, 


Desire,  Desirability  105 

and  the  like  are  examples  of  this;  these  are  in  the  nature 
of  unearned  increments  for  every  one  who  utilizes  them. 

10.  Desires  and  Association  of  Ideas. — As  a  social  being 
man's  desires  are  influenced  by  the  association  of  ideas. 
This  is  exemplified  in  the  change  of  fashions.  The  classes 
of  society  tend  to  go  in  groups  and  to  follow  the  leaders. 
Those  things  which  the  leaders  wear,  eat,  or  otherwise 
enjoy,  the  followers  strive  to  obtain. 

When  a  style  of  dress  becomes  "common,"  and  is  worn 
by  the  lower  classes,  it  is  discarded  by  the  fashionable 
people.  Fashions  that  are  absolutely  repulsive  at  first 
will  often  be  adopted  if  they  are  introduced  by  popular  or 
noted  persons.  From  his  excesses  Henry  VIII  became  a 
bloated  figure  in  the  latter  part  of  his  life,  and  the  aris- 
tocracy stuffed  their  clothing  to  imitate  his  size.  Queen 
Elizabeth  had  auburn  hair,  and  the  ladies  of  fashion 
sought  for  a  dye  that  would  turn  their  hair  to  the  aris- 
tocratic shade. 

To  use  an  example  from  Halleck's  Psychology:  When 
negligee  hats  first  made  their  appearance,  a  shrewd  hatter 
sent  for  a  very  popular  and  well-dressed  collegian  and 
offered  him  his  choice  of  the  best  hats  in  the  store,  if  he 
would  wear  a  negligee  hat  for  three  days.  He  objected  to 
making  such  an  exhibition  of  himself,  until  he  was  flat- 
tered by  the  hatter's  wager  that  the  hats  could  in  this 
way  be  made  the  fashion  for  the  entire  town.  When  the 
collegian  first  put  in  his  appearance  on  the  campus  with 
the  hat  he  was  guyed  for  its  oddity.  Later  in  the  after- 
noon some  of  his  friends  concluded  that  the  hat  looked  so 
well  that  they  would  invest.  On  the  following  day  large 
numbers  reached  the  same  conclusion.  For  some  time 
after  this  the  hatter  found  difficulty  in  keeping  a  sufficient 


106  Introduction  to  Economics 

supply  in  stock.  Had  an  unpopular  or  poorly  dressed 
man  appeared  first  on  the  campus  with  that  hat,  the  result 
would  have  been  the  reverse.  The  hat  would  have  been 
the  same,  but  the  association  of  ideas  would  have  differed. 

A  knowledge  of  the  power  of  the  association  of  ideas  is 
of  the  utmost  importance  in  business.  One  man  has  his 
store  so  planned  that  all  its  associations  are  pleasing,  from 
the  manners  of  the  clerks  to  the  fixtures  and  drapery. 
Another  store  brings  up  unpleasant  associations.  A  busi- 
ness man  was  about  to  employ  a  young  man  for  an  impor- 
tant position,  when  one  day  the  elder  chanced  to  catch 
sight  of  him  in  questionable  company.  The  law  of  con- 
tiguity henceforth  brought  up  this  company  whenever 
the  young  man  was  thought  of,  and  he  failed  to  secure 
the  position. 

ii.  Altruistic  desires  have  a  profound  influence  on  the 
economic  conduct  of  men.  This  is  especially  true  in  an 
advanced  stage  of  civilization.  There  are  broader  traits 
of  character  than  a  selfish  desire  for  wealth.  We  strive 
for  personal  economic  advantage,  but  we  are  guided  by  a 
feeling  of  duty,  and  if  we  disobey  this  feeling  our  own 
conscience  condemns  us.  We  fear  contempt  and  desire 
personal  honor,  also  we  obey  the  inward  command  to  be 
right.  We  are  social  beings  with  imagination  and  sym- 
pathy. We  think,  remember,  observe,  and  are  troubled 
by  the  distress  of  others.  It  is  in  our  nature  to  have  altru- 
istic desires  and  to  spend  our  substance  and  labor  to 
gratify  them.  Orphan  asylums,  one  hundred  and  fifty 
millions  for  the  Red  Cross,  homes  for  the  aged,  societies 
for  the  protection  of  children  and  of  animals  represent 
economic  activity  of  the  altruistic  type.  Desire  and  striv- 
ing to  improve  the  economic  order  of  the  world  are  con- 


Desire,  Desirability  107 

stantly  increasing  in  scope  and  depth.  The  teachings  of 
those  who  would  limit  economics  to  the  selfish  getting  and 
using  of  wealth  are  fruitless,  because  their  concept  is  one 
of  unreal  simplicity. 

Economic  desires  are  also  altruistic  with  respect  to  suc- 
ceeding generations.  We  follow  an  economic  policy,  in- 
definite and  crude,  perhaps,  toward  sounder  economic  con- 
duct and  greater  well-being  for  the  future.  We  desire  to 
transmit  a  richer  world  than  the  one  we  have  inherited 
from  the  past.  Desires  of  this  kind  largely  guide  legisla- 
tion of  an  economic  nature,  such  as  vast  public  expend- 
itures for  social  and  industrial  improvement.  Selfish  desires 
for  private  acquisition  and  desires  for  a  fuller  productive 
capacity  are  both  encompassed  in  the  science  of  economics. 

12.  Desires  and  Wants. — "Two  pounds  of  tea,"  says 
Hearn,  "were  presented  to  Charles  II  as  a  present  worthy 
of  a  king.  A  century  afterward  the  steady  perseverance 
of  the  Americans  in  abstaining  from  their  unjustly  taxed 
tea  was  rightly  regarded  as  the  most  remarkable  case  of 
self-denial  that  history  records."  And  Bastiat  says:  "It  is 
a  phenomenon  well  worthy  of  remark,  how  quickly,  by 
continuous  satisfaction,  what  was  at  first  only  a  vague 
desire  quickly  becomes  a  taste,  and  what  was  only  a  taste 
is  transformed  into  a  want,  and  even  a  want  of  the  most 
imperious  kind."  A  desire  to  see  the  World  Series,  how- 
ever, cannot  be  termed  a  want.  We  want  for  things  nec- 
essary to  our  state  of  being.  If  the  educated  or  the  wealthy 
are  suddenly  reduced  by  misfortune,  they  want  for  things 
which  the  ignorant  and  the  poor  would  regard  as  luxuries. 
Habits  of  life  determine  wants;  changing  habits  transform 
mere  desires  into  wants.  Habits  are  confirmed  and  wants 
are   created   by   the   continuous   gratification   of   desires. 


108  Introduction  to  Economics 

Painful  desires  or  wants  arise  when  the  requirements  of 
habits  are  denied.  We  desire  for  both  luxuries  and  neces- 
sities but  we  never  want,  in  the  true  sense  of  that  word, 
for  luxuries. 

13.  Necessities. — Luxuries  are  economic  goods  or  ser- 
vices which  are  not  necessities,  whereas  necessities  are 
those  goods  the  lack  of  which  would  occasion  wants  or 
painful  desires.  We  may  classify  necessities  as  absolute, 
acquired,  and  conventional.  Absolute  necessities  include 
warmth,  shelter,  and  food,  which  are  necessary  to  the 
maintenance  of  life.  Acquired  necessities  include  items 
like  tobacco.  In  estimating  the  necessary  outlays  of  the 
laborer  who  uses  tobacco,  it  would  be  an  error  not  to  take 
account  of  his  expenditures  for  tobacco,  because  he  would 
deny  himself  other  and  much  needed  goods  rather  than  be 
deprived  of  it.  Conventional  necessities  include  goods  of 
a  quality  and  style  which  are  in  keeping  with  one's  social 
ranking.  The  minister  is  not  expected  to  appear  in  the 
coarse  clothing  of  the  day-laborer.  The  doctor  or  dentist 
is  socially  ostracized  whose  instruments  and  office  equip- 
ment are  below  a  certain  grade  of  elegance.  Those  goods 
are  necessities  which  accord  with  one's  station  in  life.  Ac- 
quired and  conventional  necessities  must  form  a  part  of 
the  expenditures  of  the  class  concerned.  The  more  one  is 
forced  to  spend  for  these  the  less  he  will  have  to  spend  for 
other  goods.  Instructors  are  hard  put  to  it  at  times  be- 
cause they  are  compelled  to  dress  and  maintain  quarters 
which  would  be  in  keeping  with  a  larger  income. 

14.  Repressibility  of  Desires. — Our  most  irrepressible 
appetites  are  for  the  common  necessities  of  life.  These 
we  will  have,  whether  our  income  be  large  or  small.  De- 
sires for  the  primary  necessities,  however,  are  most  quickly 


Desire,  Desirability  109 

satisfied.  It  is  all  but  impossible  to  repress  the  craving 
for  food,  yet  the  desire  for  food  is  quickly  gratified.  On 
the  contrary,  our  most  repressible  desires  are  our  most 
insatiable  desires.  There  is  no  end  to  our  desires  for  com- 
forts of  the  higher  form,  yet  if  forced  to  economize  we  cut 
down  on  the  consumption  of  these  first. 

15.  The  standard  of  life  is  but  a  level  of  consumption. 
The  habits  and  requirements  which  prevail  in  society  call 
for  a  rather  definite  standard  of  consumption.  These  hab- 
its and  requirements  undergo  gradual  change,  because  they 
result  from  natural  and  social  influences  which  are  slowly 
modified  through  long  periods  of  time.  The  quantity  and 
variety  of  food,  clothing,  and  shelter,  the  standard  of 
public  utilities  required,  the  provision  for  sanitation,  recre- 
ation, education,  and  protection,  roughly  measure  the  eco- 
nomic standard  of  life.  Man's  consumption  is  limited  by 
his  income,  but  his  level  of  consumption  is  his  standard  of 
life,  therefore,  his  income  determines  his  standard  of  life. 
The  forces  operating  on  income,  then,  are  the  forces  which 
fix  this  standard.  The  forces  operating  on  income  are  two; 
man  and  his  surroundings.  These  forces  adjusted  to  each 
other  constitute  productive  capacity.  Land  may  be  fer- 
tile and  resources  abundant,  yet  if  the  man  element  is 
weak  or  poorly  adjusted  to  its  surroundings,  a  low  income, 
consequently  a  low  standard  of  life,  must  prevail.  Con- 
versely the  man  element  may  be  skilful,  strong,  and  of 
superb  moral  character,  yet,  if  resources  are  wanting,  a  low 
standard  must  prevail.  Low  production  and  a  low  stand- 
ard, and  high  production  and  a  high  standard  always 
accompany  each  other. 

We  have  seen  that  desire  is  the  motivating  force  of  pro- 
duction, but  another  fact  of  primary  importance  is  that 


110  Introduction  to  Economics 

production  or  income  is  limited  by  productive  capacity. 
Furthermore,  while  desire  stimulates  production  it  invari- 
ably outruns  production;  we  always  desire  more  than  we 
produce.  Then,  desire  causes  the  standard  to  be  as  high 
as  it  is  and  the  limits  of  productive  capacity  cause  it  to 
be  as  low  as  it  is.  In  other  words,  the  standard  of  life  is 
determined  by  two  forces;  desire  and  productive  capacity. 
This  illustrates  the  interaction  of  economic  phenomena. 
A  given  state  of  being  is  the  result  of  a  tendency  or  pre- 
vailing direction  of  motion  of  a  number  of  forces  which, 
individually,  would  operate  in  different  directions. 

Do  higher  desires  cause  a  large  production  of  income, 
or  does  the  consumption  of  a  larger  income  give  rise  to 
higher  desires?  The  answer,  in  keeping  with  the  above 
reasoning,  is  that  these  phenomena  interact;  both  are  re- 
quired for  economic  advance.  Although  limited  capacity 
holds  the  income  in  check,  it  must  not  be  overlooked  that 
desire  is  fundamental  to  production. 

1 6.  The  Notion  of  Scarcity. — In  the  economic  sense 
there  is  no  such  thing  as  scarcity  apart  from  either  a  desire 
or  a  need.  Fewness  and  scarcity  are  not  synonyms. 
There  are  few  mud-holes  in  dry  weather,  but  they  are  not 
scarce  in  the  economic  sense,  there  being  neither  desire 
nor  need  of  them.  If  there  are  few  blacksnakes,  they  are 
not  scarce.  Any  economic  good,  on  the  contrary,  is 
scarce,  for  if  it  were  not  scarce  it  would  be  a  free  good  and 
not  an  economic  good.  Goods  are  said  to  be  scarce  so 
long  as  our  desires  or  needs  are  not  fully  gratified  with 
respect  to  them.  Should  we  add  loaf  after  loaf  to  the 
supply  of  bread  until  bread  became  as  common  as  leaves 
on  the  ground,  then  there  would  be  no  scarcity  of  bread. 
But  bread  is  scarce  so  long  as  desires  and  needs  are  not 


Desire,  Desirability  111 

fully  gratified.  Then  we  cannot  determine  the  scarcity  of 
a  thing  by  the  amount  of  it;  rather  scarcity  is  measured 
in  subjective  terms.  Regardless  of  the  amount,  if  there 
be  a  desire  or  need  for  a  particular  commodity  it  is  scarce. 
There  are  degrees  of  scarcity  (scarce,  scarcer,  scarcest), 
corresponding  to  the  strength  of  the  desire  or  need. 

17.  Desirability  is  the  quality  of  goods  or  services  which 
is  calculated  or  fitted  to  excite  a  wish  to  possess.  Many 
economists  employ  the  word  utility  in  the  sense  which  I 
have  defined  for  the  word  desirability.  Desirability  is 
preferred  in  this  book  for  two  reasons:  it  expresses  ac- 
curately the  meaning  intended,  whereas  utility  is  burdened 
with  so  many  definitions  as  to  have  no  one  distinct  mean- 
ing. Goods  having  desirability  may  be  positively  harmful, 
may  detract  from  the  well-being  of  the  user.  Goods  hav- 
ing this  quality  may  or  may  not  serve  our  needs,  but  they 
always  serve  our  desires.  Desirability  changes  with  respect 
to  persons,  occasions,  times,  and  the  condition  of  supply. 
The  painting  has  desirability  for  the  lover  of  art,  but  it 
can  excite  no  wish  to  possess  in  the  mind  of  the  savage; 
the  desirability  of  formal  attire  is  greater  on  formal  occa- 
sions; present  goods  have,  with  few  exceptions,  a  higher 
desirability  than  future  goods;  and  bread  has  a  higher 
desirability  when  scarce  than  when  abundant.  In  any 
case  the  desirability  of  a  good  is  determined  by  two  things 
— the  strength  of  the  desire  to  be  met  and  the  fitness  of 
the  good  to  meet  the  desire. 

18.  Utility  must  not  be  confused  with  desirability. 
These  concepts  may  be  used  interchangeably  at  times 
without  harm,  but  under  other  conditions  they  are  anto- 
nyms. Utility  is  a  social  rather  than  an  individualistic 
concept;  it  is  an  objective  quality  of  goods  or  services. 


ll£  Introduction  to  Economics 

Utility  is  that  quality  or  fitness  of  things  to  promote  and 
serve  well-being.  There  are  blessings  in  disguise;  our 
needs  are  administered  to  and  our  well-being  promoted  by 
things  which  we  neither  desire  nor  understand,  even  by 
things  which  we  would  avoid  as  distasteful  to  us.  iEsop 
said:  "We  would  often  be  sorry  if  our  wishes  were  grati- 
fied." It  is  not  utility  but  desirability,  the  fitness  to 
excite  a  wish  to  possess,  which  directly  introduces  the 
value  problem. 

19.  Diminishing  desirability  expresses  the  elementary 
principle  that  if  the  quantity  of  shoes,  tea,  or  any  other  com- 
modity increases,  its  total  desirability  increases  at  a  dimin- 
ishing rate.  An  example  will  make  this  clear:  Let  us  sup- 
pose that  a  caravan  travelling  through  a  desert  has  one 
pint  of  water.  With  great  saving  and  extreme  economy 
the  traveller  can  perhaps  survive  upon  this  limited  amount. 
What  is  its  desirability  for  him?  Being  indispensable  to 
life,  its  desirability  is  immeasurable.  Add  a  second  pint 
to  the  supply  and  it  will  have  great  desirability,  although 
it  is  not  absolutely  essential  for  the  preservation  of  life. 
If  there  be  added  a  third,  fourth,  and  on  down  to  the 
twentieth  pint,  he  will  have,  let  us  assume,  a  sufficiency. 
The  undesirability  of  carrying  another  pint  would  be  near 
the  equivalent  of  its  desirability.  Thus  we  see  that  by 
adding  to  the  amount  the  total  desirability  increases  at  a 
diminishing  rate. 

20.  The  Equal  Desirabilities  of  Units. — Then,  considered 
as  a  whole,  all  desires  are  insatiable  but  any  one  desire,  as 
the  desire  for  water,  may  be  fully  satisfied  and  cease  to 
exist.  Another  observation  is  that  each  like  unit  which  is 
added  to  a  supply  causes  ".\q  desirability  of  each  other 
unit  in  the  supply  to  be  lowered.     For  instance,  the  trav- 


Desire,  Desirability  113 

eller  through  the  desert  may  start  with  two  pints  of  water, 
and  if  to  these  he  adds  a  third,  fourth,  and  fifth  pint  he 
will  not  appraise  the  two  pints  so  highly  as  if  the  supply 
had  not  been  increased.  Suppose  that  the  five  units  in 
his  possession  are  alike  in  all  respects,  no  one  of  them 
could  be  more  desirable  than  any  other.  Each  of  the 
units  in  his  supply  has  a  desirability  equal  to  that  of  any 
other.  Put  as  a  general  proposition:  Like  units  in  the 
same  supply  at  the  same  time  are  of  the  same  desirability. 

Crusoe  had  four  guns,  and  assume  that  these  were  ex- 
actly alike.  Can  we  say  that  any  one  of  these  had  more 
desirability  for  him  than  any  other?  Certainly  not.  To 
provide  himself  with  animal  food  and  to  keep  off  the 
beasts  of  prey,  it  was  absolutely  essential  that  he  have  a 
gun,  but  it  was  not  imperative  that  he  have  more  than 
one  or  two.  It  would  have  been  fortunate  for  him  could 
he  have  exchanged  a  gun  for  food  or  clothing.  This  exam- 
ple teaches  us:  (i)  that  the  like  units  of  a  supply  are  of 
equal  desirability,  (2)  that  the  larger  the  number  of  units 
in  a  supply,  the  less  is  the  desirability  of  any  one  of  the 
units,  (3)  that  we  can  measure  the  desirability  of  any  one 
unit,  as  when  we  wish  to  exchange  it  for  another  good. 
But  it  must  be  clear  that  we  cannot  reason  relative  to  the 
total  desirability  of  a  supply  in  the  same  way  that  we  rea- 
son relative  to  one  or  more  units  in  the  total  supply. 
Crusoe  might  well  have  sold  a  gun  for  the  price  of  one 
bushel  of  grain,  but  it  does  not  follow  that  it  would  be  wise 
for  him  to  exchange  the  four  guns  for  four  bushels.  In 
the  former  case  he  would  profit  by  the  trade;  in  the  latter 
he  would  be  without  the  means  of  protecting  his  life. 

21.  Total    Desirability. — Suppose    that    our    caravaner 
would  be  willing  to  sell  any  one  of  his  pints  of  water  for 


114 


Introduction  to  Economics 


ten  cents,  does  it  follow  that  he  would  be  willing  to  sell 
the  twenty  pints  for  two  dollars?  On  first  thought  one 
would  say  that  since  the  different  pints  are  of  the  same 
desirability  it  would  follow  that  if  one  pint  is  worth  ten 
cents,  twenty  pints  must  be  worth  twenty  times  ten  cents, 
or  two  dollars.  This  is  good  arithmetic  but  poor  eco- 
nomics. Should  the  caravaner  dispose  of  his  total  supply, 
he  would  die  for  want  of  water.  Needless  to  say,  he  would 
not  sell  it  at  any  price.  This  makes  it  clear  that  the  de- 
sirability of  a  unit  of  the  supply  multiplied  by  the  number 
of  units  in  the  supply  does  not  give  the  total  desirability 
of  the  supply.  Then,  how  may  we  calculate  the  total 
desirability  of  a  supply?  It  is  evident  that  if  the  first 
pint  be  subtracted  from  the  supply  the  remaining  nineteen 
will  each  have  a  higher  desirability,  and,  further,  that  the 
desirability  of  the  remaining  pints  would  be  increased  by 
the  subtraction  of  the  second,  third,  etc.  In  order  to 
attain  the  total  desirability  of  a  supply  we  may  assume 
that  one  unit  at  a  time  is  subtracted  in  succession,  and 
that  the  desirabilities  of  each  unit  are  added. 

22.  Graphic  illustration  of  the  equal  desirabilities  of  dif- 
ferent units  at  a  given  time  in  a  total  supply. 


G 


'1    2    3    4    5    6    7    8    9  10  1112  13  141516  17  18  19  20 

Figure  i 


D 


The  parallelogram  A  B  C  D  pictures  the  situation  of 
twenty  units  at  a  given  time  in  a  homogeneous  supply. 
The  perpendicular  lines  are  of  equal  length  and  each  repre- 
sents the  desirability  of  a  unit. 

Since  each  unit  :n  the  supply  has  the  same  desirability 


Desire,  Desirability 


115 


as  any  other  unit,  the  length  of  the  lines  representing 
these  must  be  equal  to  one  another.  This  figure,  however, 
does  not  picture  the  total  desirability  of  the  supply. 

As  above  pointed  out,  the  total  desirability  is  obtained 
by  a  succession  of  subtractions,  each  of  which  increases  the 
desirabilities  of  the  remaining  units. 

23.  Graphic  illustration  of  the  desirabilities  of  units  at 
different  times,  showing  how  they  increase  as  the  supply 
is  diminished. 


Figure  2 


In  the  case  above  assumed  (paragraph  21),  it  would  be 
found,  as  shown  in  Fig.  2,  that  by  subtracting  unit  after 
unit  from  D  C  toward  A  B,  the  desirabilities  increase 
until  they  become  immeasurable.  In  this  case  the  total 
desirability  would  be  immeasurable.  Of  course,  we  are 
assuming  an  extreme  case,  but  oftentimes  a  principle  is 
better  grasped  when  presented  in  its  extreme  form. 

24.  Marginal  desirability  is  the  desirability  of  the  last 
added  portion  of  a  supply.  But  the  last  added  portion 
has  the  same  desirability  as  any  other  like  portion,  there- 


116  Introduction  to  Economics 

fore  the  marginal  desirability  is  the  desirability  of  a  por- 
tion or  unit  of  the  supply.  In  case  of  freely  reproducible 
goods,  and  these  are  most  characteristic  of  the  market, 
marginal  desirability  is  equal  to  the  benefits  which  must 
be  foregone  in  acquiring  them.  Assume  that  a  housewife 
is  making  out  an  order  to  Sears,  Roebuck  &  Co.  for  a  supply 
of  soap  which  is  priced  at  five  cents  a  cake.  How  much  will 
she  order?  She  would  probably  give  a  dollar  for  a  cake 
rather  than  be  denied  the  use  of  soap.  It  goes  without 
saying  that  the  desirability  of  a  cake  of  soap  is  so  much 
stronger  than  the  desirability  of  retaining  the  five  cents 
for  buying  something  else  that  she  decides  to  make  the 
purchase.  A  second,  third,  fourth,  and  on  down  to  the 
nineteenth  cake,  let  us  assume,  have  each  a  higher  desira- 
bility for  her  than  has  the  alternative  use  of  the  five  cents. 
Whether  to  buy  the  twentieth  cake  gives  her  concern. 
She  will  buy  the  twentieth  cake  if  its  desirability  be  but 
a  small  fraction  above  that  of  five  cents.  The  twentieth 
cake  reaches  the  marginal  point  where  the  cost  or  unde- 
sirability  comes  to  equal  the  desirability. 

25.  The  Tendency  to  Equality  of  Marginal  Desirabili- 
ties.— Marginal  desirability  is  an  individual  matter,  vary- 
ing from  person  to  person,  and  the  tendency  of  desirabili- 
ties of  different  supplies  for  any  one  person  is  toward 
equality.  The  housewife  did  not  stop  with  a  supply  of 
twenty  cakes  because  she  desired  no  more  soap,  for  had 
the  price  been  four  cents,  she  would  probably  have  bought 
twenty-five  cakes.  Nor  did  she  so  limit  her  supply  be- 
cause she  wished  to  save  the  five  cents.  She  ceased  to 
buy  soap  because  she  could  gratify  a  more  intense  desire 
by  spending  the  five  cents  for  something  else.  It  is  a  part 
of  human  nature  so  to  spend  means  as  to  gratify  the  most 
intense  desire.     Rather  than  buy  more  soap,  a  housewife 


Desire,  Desirability  117 

will  buy  fruit,  buttons,  sugar,  or  coffee.  How  much  of 
each  of  these  goods  will  she  buy  ?  She  cannot  buy  all  the 
things  which  have  desirability  for  her;  she  must  draw  the 
line  somewhere.  She  will  so  distribute  her  expenditures 
among  the  several  goods  as,  in  her  judgment,  to  secure  the 
maximum  desirability.  The  more  she  buys  of  some  goods, 
the  less  she  can  buy  of  others.  Her  expenditures  in  the 
several  lines  are  limited  by  a  boundary-line  drawn  through 
the  different  points  of  marginal  desirability.  Her  expen- 
diture for  sugar  limits  the  amount  she  can  spend  for  coffee 
or  any  other  good.  Her  different  desires  are  supplied  by 
a  transfer  of  money  from  other  lines  of  expenditure.  She 
ceases  to  spend  money  on  any  good  the  moment  that  she 
can  secure  a  higher  desirability  by  transferring  her  pur- 
chasing power  to  some  other  class  of  goods.  Her  transfer 
of  money  from  one  class  of  goods  to  another,  in  her  attempt 
to  secure  the  greatest  total  desirability,  tends  to  equalize 
the  marginal  desirabilities  of  different  classes  of  goods. 

26.  Graphic  Illustration. — Let  A,  B,  C,  D,  and  E,  in 
Figure  3,  represent  five  classes  of  goods.  Let  the  Arabic 
figures  represent  the  desirability  of  different  units.     Let  S  T 

represent  the  line  of  satiety, 
and  M  N  the  line  drawn 
through  the  different  points 
of  marginal  desirability.  It  is 
seen  that  the  housewife's  de- 
sire is  to  transfer  her  expendi- 
ture so  as  to  secure  the 
maximum  desirability,  and 
that  by  so  doing  she  has 
*"  3'  brought    about    an    equality 

with  respect  to  the  marginal  desirabilities  of  the  several 
lines  of  supply.     The  tendency  is   always   to  secure   this 


A 

B 

C 

D 

E 

11 

10 

10 

10 

9 

9 

9 

9 

8 

8 

8 

8 

8 

7 

7 

7 

7 

7 

6 

6 

6 

6 

6 

M 

S 

:     5 

5 

5 

5 

5 

N 
T 

118  Introduction  to  Economics 

equality,  although  it  is  rarely  attained,  in  fact  never  attained 
among  the  poor.  Now,  should  we  assume  that  she  desires 
to  buy  some  other  goods,  say  F,  G,  and  H,  it  is  at  once 
evident  that,  other  things  equal,  she  will  have  less  to  spend 
on  A ,  B,  C,  D,  and  E.  Her  supply  of  each  of  these  will 
be  less,  or,  what  is  the  same,  their  marginal  desirabilities 
will  be  raised.  Thus  we  see  that  each  line  of  goods  limits 
the  supply  and  increases  the  marginal  desirability  of  every 
other  class  of  goods.  If  we  did  not  have  to  buy  bread  we 
could  buy  more  clothing,  and  if  houses  were  free  goods  we 
could  spend  more  for  automobiles;  every  line  of  goods  is 
competing,  in  a  sense,  with  every  other  line  of  goods.  We 
shall  see  later  on  how  a  proportion  and  balance  of  all  classes 
of  productive  industries  are  worked  out  in  keeping  with 
the  relative  market  prices. 

27.  Examples  of  Marginal  Desirability. — The  purpose  of 
this  paragraph  is  to  answer  some  questions  which,  through- 
out my  teaching  experience,  I  have  found  bothersome  to 
beginners.  Goods  have  marginal  desirabilities,  to  be  sure, 
whether  they  are  for  keep  or  for  sale.  But  the  comparison 
of  marginal  desirabilities  of  goods  which  one  has  to  offer 
with  that  of  the  goods  which  he  may  purchase,  is  primary 
to  an  exchange.  Marginal  desirability  is  truly  a  basic  con- 
cept in  exchange. 

(a)  I  have  been  asked  a  number  of  times  how  to  dispose 
of  the  marginal  desirability  of  free  goods  in  our  exchange 
economy.  The  answer  is  that  a  free  good  exists  in  such 
abundance  that  its  marginal  desirability  is  zero.  In  fact, 
it  has  no  marginal  desirability.  Only  scarce  goods  have 
marginal  desirability  and  only  such  goods  enter  into  an 
exchange  economy. 

(b)  It  was  my  privilege  recently  to  converse  with  Mr. 


Desire,  Desirability  119 

N.  G.  Kidd,  a  pioneer  of  western  Ohio,  who  was  within 
three  months  of  the  marvellous  age  of  one  hundred  years. 
His  vivid  memory  of  happenings  in  youth  gave  deep  in- 
terest to  his  reminiscences.  He  remarked  that  while  on 
his  way  from  Virginia  to  his  new  abode  he  had  travelled 
some  days  with  horse  and  drag-sled,  when  it  became  neces- 
sary to  use  his  axe.  He  was  keenly  disappointed  to  find 
that  it  had  been  left  behind.  Leaving  his  young  sister 
with  the  horse  and  load,  he  journeyed  back  four  days  to 
get  the  axe.  The  desirability  of  the  axe  to  the  frontiers- 
man is  all  but  immeasurable.  Did  this  axe,  the  only  unit 
of  the  supply,  have  marginal  desirability  for  him?  The 
student's  answer  is  generally  in  the  negative.  But  most 
assuredly  it  did  have  marginal  desirability,  and  that,  too, 
in  the  highest  degree.  It  is  only  for  the  purpose  of  illus- 
tration that  economists  speak  of  unit  after  unit  being 
added  to  a  supply.  The  one  unit  of  a  supply  has  mar- 
ginal desirability.  This  marginal  desirability  is  equal  to 
the  strength  of  the  desire  which  would  be  defeated  were 
the  article  lost  or  otherwise  removed. 

(c)  A  student  put  this  question  in  class:  "In  case  one 
has  fifteen  tons  of  coal  in  the  cellar  or  a  hundred  bushels 
of  apples  in  storage,  does  any  one  unit  hold  a  marginal 
place  in  the  supply?"  He  was  answered  in  the  negative. 
"Then,"  he  continued,  "if  there  is  no  marginal  item  there 
can  be  no  marginal  desirability."  In  reply  one  may  say 
that  in  a  homogeneous  supply  any  unit  may  be  considered 
marginal  in  the  sense  that  the  desire  defeated  by  the  loss 
o£,it  is  precisely  the  same  as  that  occasioned  by  the  loss  of 
any  other  unit  of  the  supply. 

All  scarce  goods  have  marginal  desirability;  it  makes  no 
difference  whether  we  consider  a  succession  of  units  added 


120  Introduction  to  Economics 

one  after  another,  or  a  stock  of  goods  on  hand,  or  a  supply 
consisting  of  a  single  unit. 

(d)  Another  and  difficult  query:  Does  a  dollar  serve  as 
a  common  measure  of  marginal  desirability?  The  answer 
is  most  emphatically  in  the  negative.  Marginal  desira- 
bility is  an  individual  matter.  There  may  be  as  many 
marginal  desirabilities  as  there  are  buyers  and  sellers.  A 
dollar  has  a  different  significance  to  the  rich  and  to  the 
poor,  to  the  spendthrift  and  to  the  miser.  Assume  that 
two  men,  one  rich  and  the  other  poor,  are  in  the  market 
for  a  horse.  The  circumstances  of  the  poor  man  may  be 
such  that  a  horse  would  have  double  the  desirability  for 
him  as  for  the  rich  man,  yet  the  latter  may  be  willing  to 
pay  $200  whereas  the  former  would  pay  not  more  than 
$100.  The  pressing  need  for  alternative  goods  may  for- 
bid the  poor  man  offering  more,  whereas  the  wealthy  pur- 
chaser could  expend  $200  without  denying  himself  any 
felt  necessity.  To  these  men  the  marginal  desirability  of 
a  dollar  is  vastly  different.  To  take  a  different  supposi- 
tion: The  marginal  desirability  of  a  dollar  may  be  ten 
times  as  great  for  the  poor  boy  as  for  the  rich  man's  son, 
yet  both  may  be  marginal  buyers,  that  is,  barely  willing 
to  pay  a  dollar,  say,  for  a  ticket  to  a  ball-game.  How 
account  for  the  fact  that  these  boys,  one  estimating  a  piece 
of  money  ten  times  as  high  as  the  other,  are  both  marginal 
buyers  of  the  same  thing  at  the  same  price?  Neither,  in 
this  assumption,  would  pay  a  penny  more  than  a  dollar  for 
the  ticket — both  are  strictly  marginal  buyers  at  the  price 
of  a  dollar.  The  explanation,  and  the  only  one,  is  found 
in  this:  the  marginal  desirability  of  the  game  is  ten  times 
as  great  for  the  poor  as  for  the  rich  boy.  If  the  dollar 
and  the  game  have  each  one  unit  of  desirability  for  the 


Desire,  Desirability  121 

rich  boy,  they  must  each  have  ten  units  for  the  poor  boy. 
The  equality  of  ratios  between  the  alternative  good  to  be 
bought  with  the  dollar  and  the  game  is  the  only  sense  in 
which  the  marginal  desirabilities  of  these  boys  are  com- 
parable. Throughout  the  market  the  marginal  desirabili- 
ties of  different  classes  of  purchasers  are  comparable  only 
in  the  sense  of  the  equality  of  ratios.  It  is  in  the  sense  of 
the  equality  of  ratios  that  different  classes  are  brought 
together  as  marginal  buyers  in  the  same  market  at  the 
same  price. 

28.  Exercises. — 1.  What  is  the  connection  between  intel- 
ligence, desire,  and  effort? 

2.  What  reasons  can  you  give  for  the  fact  that,  as  a 
rule,  one's  desire  for  the  present  possession  of  a  good  is 
stronger  than  the  desire  for  the  future  possession  of  it  ? 

3.  What  is  meant  by  the  principle  of  harmony  in  con- 
sumption? Give  an  example  of  how  the  purchase  of  one 
thing  calls  for  the  purchase  of  other  things  in  each  of  the 
following:  buying  a  rug,  a  gun,  a  pen,  an  engine,  a  horse. 

What  other  industries  have  benefited  by  the  great  de- 
mand for  automobiles  within  recent  years? 

4.  Would  the  "simple  life,"  causing  a  desire  for  only  a 
few  simple  goods,  bring  about  a  larger  or  a  smaller  pro- 
duction of  goods  than  we  now  enjoy?  (Review  para- 
graphs 7  and  8  before  answering  this.) 

5.  Give  two  examples — the  one  to  show  how  a  business 
house  has  been  prospered,  and  the  other  to  show  how  a 
business  house  has  been  injured  through  the  association  of 
ideas. 

6.  Give  two  examples  of  large  expenditures  during  the 
World  War  to  gratify  the  altruistic  desires  of  the  people. 

7.  What  is  meant  by  the  standard  of  life?  By  what 
forces  is  it  determined  ? 

8.  "Fewness  and  scarcity  are  not  synonyms."  (Para- 
graph 16.)     Tell  why. 


122  Introduction  to  Economics 

9.  Desirability  and  utility  are  not  synonyms.  (Para- 
graphs 17  and  18.)  Define  each  of  these  terms  in  your  own 
words. 

10.  By  adding  ton  after  ton  to  my  supply  of  coal,  the 
total  desirability  increases  at  a  diminishing  rate.  What 
principle  is  involved  in  this  statement  ?  Show  the  relation- 
ship between  this  principle  and  that  of  the  equal  desirabil- 
ity of  units  in  a  supply  of  like  goods 

11.  Define  marginal  desirability. 

By  means  of  the  principle  of  marginal  desirability,  ex- 
plain the  following: 

(a)  The  housewife,  in  the  above  example  (paragraph  24) 
stopped  with  the  purchase  of  the  twentieth  cake  of  soap, 
although  she  desired  many  more.  If  the  price  had  been 
reduced  from  five  to  four  cents  a  cake,  she  would  have 
purchased  twenty-five  cakes. 

(b)  One  enjoys  the  maximum  desirability  by  maintain- 
ing an  equality,  so  far  as  he  can,  of  the  marginal  desirabili- 
ties of  the  different  goods  he  buys. 

(r)  An  essential,  such  as  bread,  is  worth  less  than  a 
luxury,  such  as  a  diamond. 

(d)  One  ordinarily  attributes  no  value  to  air. 

(e)  A  part  may  be  worth  more  than  the  whole;  for  by 
destroying  a  portion  the  remainder  goes  up  in  price.' 

(/)  In  a  fair  trade,  both  parties  are  benefited. 


CHAPTER   VII 
MARKET  AND  PRICE 

i.  What  is  a  market?  2.  Examples  of  a  market.  3.  Transportation 
extends  the  market.  4.  Wheat  is  sold  in  a  broad  market.  5.  Transporting 
costs  taken  into  account.  6.  The  demand  at  Liverpool.  7.  The  com- 
munication of  information.  8.  Market  ratios  and  price.  9.  The  market 
price  at  equating-point  between  market  supply  and  market  demand.  10. 
The  problem  of  price,  n.  The  price  level.  12.  Price-making.  13.  Con- 
ditions of  price-making:  (I)  One  seller  without  a  marginal  limit.  (II)  One 
seller  with  a  marginal  limit.  (Ill)  A  number  of  sellers  with  marginal 
limit.     (IV)  Two-sided  competition.     14.  Exercises. 

i.  What  Is  a  Market? — In  common  parlance  we  have 
"the  world  market,"  "the  American  market,"  "the  New 
York  market,"  "  the  New  Orleans  market,"  etc.  These  ex- 
pressions signify  place  as  essential  to  the  definition  of  a 
market.  Again  we  have  "the  wheat  market,"  "the  money 
market,"  "the  cotton  market."  These  expressions  centre 
around  the  idea  of  a  particular  commodity.  We  debate 
the  advisability  of  establishing  a  "central  city  market"  to 
which  farmers  may  bring  their  various  products  and  dis- 
pose of  them  direct  to  the  consumers.  Here  the  word 
market  signifies  the  coming  together  of  buyers  and  sellers 
with  respect  to  a  number  of  different  commodities.  The 
word  market  is  abused  by  such  a  variety  of  uses  that  we 
spare  space  to  give  it  precise  definition. 

The  word  market  does  not  signify  any  particular  place 
nor  does  it  refer  to  a  group  of  commodities  indiscriminately. 
It  means  an  agreement  within  a  group  of  exchangers  as  to 
the  price  of  a  particular  species  of  commodity.  It  will  be 
seen  that  there  is  no  such  concept  as  a  demand  for  or  a 

supply  of  a  group  of  unlike  commodities.     Supply  and  de- 

123 


124  Introduction  to  Economics 

mand  refer  to  one  species  of  commodity,  cotton,  for 
instance,  at  a  uniform  price.  The  adjustment  of  sup- 
ply and  demand  takes  place  in  a  market,  therefore  one 
market  embodies  one  species  of  commodity  and  one  group 
of  exchangers.  In  one  market  are  found  all  of  the  influences 
of  supply  and  demand  which  converge  toward  a  uniform 
price.  Due  allowance  in  price  must  be  made  in  all  cases 
for  costs  of  transit  which  are  occasioned  by  differences  in 
the  physical  location  of  the  goods  marketed. 

It  is  a  matter  of  no  consequence  whether  the  buyers  and 
sellers  of  a  species  of  commodity  live  in  the  same  village 
or  in  different  continents,  they  belong  to  the  same  market 
by  virtue  of  the  fact  that  they  buy  from  and  sell  to  each 
other.  In  the  market  goods  may  be  sold  by  actual  exhibit, 
or  by  sample,  or  by  mere  description.  The  traders  in  a 
market  may  meet  face  to  face  or  be  on  opposite  sides  of 
the  water.  They  may  make  their  offers  and  bids  by  word 
of  mouth,  by  symbol,  by  wire,  or  by  any  other  means.  It 
has  no  bearing  on  the  definition  of  a  market  whether  a 
commodity  be  controlled  by  an  absolute  monopoly  or  sub- 
ject to  unrestricted  competition.  Many  writers  deny  that 
there  is  a  market  where  competition  is  restricted.  But  if 
a  monopoly  product  like  anthracite  coal  is  not  sold  on  the 
market,  then  where  is  it  sold  ? 

2.  Examples  of  a  Market. — There  are  as  many  markets 
as  there  are  groups  of  exchangers.  A  manufacturer  sells 
one  hundred  dozen  hats  of  the  same  grade  to  a  wholesaler. 
The  wholesaler  resells  to  twenty  jobbers;  the  jobbers  resell 
to  two  hundred  retailers;  the  retailers  resell  to  a  thousand 
consumers.  This  is  an  example,  not  of  one  but  of  four 
markets. 

There  are  as  many  markets  as  there  are  differences  of 


Market  and  Price  125 

price  after  allowing  for  costs  of  transportation,  freights, 
deterioration,  insurance,  and  the  like.  One  market  implies 
uniformity  in  the  grade  offered  for  sale.  It  is  obvious  that 
if  a  vender  offers  different  portions  of  his  supply  at  differ- 
ent prices  the  purchasers  will  buy  at  the  lower  price. 
There  would  be  no  demand  at  the  higher  asking  price  and 
a  keen  demand  at  the  lower,  the  effect  of  which  would,  of 
course,  result  in  a  common  uniform  price.  Suppose,  now, 
that  the  manufacturer  sells  fifty  dozen  hats  to  a  whole- 
saler in  Winnipeg  at  one  price,  and  that  he  makes  a  simi- 
lar sale  to  a  wholesaler  in  Memphis  at  a  different  price; 
each  of  these  sells  to  twenty  jobbers  (both  sell  to  forty 
jobbers),  charging  each  jobber  a  different  price  from  all 
the  others.  Each  jobber  sells  to  ten  retailers,  charging  no 
two  the  same  price  (all  jobbers  thus  sell  to  four  hundred 
retailers).  How  many  markets  are  here  indicated?  In 
this  example  we  have  two  prices  as  between  the  manufac- 
turer and  the  wholesalers,  which  means  two  groups  of 
exchangers  and  two  markets;  as  between  the  wholesalers 
and  jobbers  there  are  forty  markets,  and  four  hundred 
markets  between  the  jobbers  and  the  retailers.  This 
totals  four  hundred  and  forty-two  markets. 

Another  example  is  needed:  The  manufacturer  of  "Mrs. 
Blank's  Face-Cream"  maintains  a  restricted  price  policy. 
He  widely  advertises  the  retail  price  of  his  article  at  50 
cents.  He  sells  without  discrimination,  large  lots  and 
small,  to  fifty  wholesalers  at  30  cents;  he  requires  the 
wholesalers  to  sell  to  retailers  at  a  fixed  price  of  40  cents 
and  a  thousand  sales  are  made  to  retailers;  the  retailers 
sell  at  a  maintained  price  of  50  cents  to  ten  thousand  con- 
sumers.    Here  we  have  three  and  only  three  markets. 

Briefly  stated:  A  market  means  an  agreement  between 


126  Introduction  to  Economics 

buyers  and  sellers  with  reference  to  the  exchange  of  a 
species  of  commodities  at  a  uniform  price,  with  allowance 
for  costs  of  transit.  Like  goods  in  a  given  market  at  the 
same  time  sell  at  the  same  price. 

3.  Transportation  Extends  the  Market. — If  there  were 
no  transportation  facilities  each  producer  would  be  com- 
pelled to  dispose  of  his  wares  in  the  immediate  vicinity  of 
their  production.  Transportation  extends  the  boundaries 
of  a  market,  without  respect  to  political  boundaries.  Ex- 
tended markets  permit  the  individuals  of  each  community 
to  enjoy  a  variety  of  goods  coming  from  the  different  cli- 
mates, soils,  and  deposits  of  resources.  Trade  is  a  means 
of  adjusting  our  goods  to  our  desires,  and  the  broader  the 
market  the  more  perfect  becomes  the  adjustment  of  our 
means  to  the  meeting  of  our  desires. 

4.  Wheat  is  Sold  in  a  Broad  Market. — The  wheat-crop 
of  19 14-15  was  the  largest  crop  in  the  history  of  this  coun- 
try. One  would  reason  that  the  price  of  wheat  would  be 
correspondingly  low.  But,  in  fact,  the  price  became  so 
high  as  to  alarm  the  public  and  make  a  demand  to  stop 
its  exportation.     How  explain  this  fact? 

Wheat  is  subject  to  definite  classification  according  to 
grade  or  quality.  All  traders  know  exactly  what  is  meant 
when  any  particular  grade  is  mentioned,  therefore  they 
may  intelligently  buy  and  sell  wheat,  which  may  be  located 
in  any  part  of  the  world,  or  which,  in  fact,  may  not  be 
harvested  at  the  time  a  trade  is  made.  Moreover,  wheat 
is  durable,  thus  making  it  capable  of  being  transported  to 
any  part  of  the  world.  Some  countries  produce  a  surplus 
and  export  wheat,  while  other  countries  cannot  supply 
their  needs,  thus  becoming  importers.  The  following 
tables  show  these  facts: 


Market  and  Price 


127 


AVERAGE  ANNUAL   EXPORTS   (1909-1913)   OF  WHEAT  OF  SIX 
PRINCIPAL  EXPORTING  COUNTRIES 


Country  Bushels 

Russia 148,262,700 

Argentina 96,858,600 

Canada 65,064,500 


Country  Bushels 

United  States 53,024,700 

India 40,711,100 

Australia 36,670,700 


AVERAGE  ANNUAL  IMPORTS   (1909-1913)   OF  WHEAT   OF  SIX 
PRINCIPAL  IMPORTING  COUNTRIES 

Country  Bushels  Country  Bushels 

Great  Britain  and  Ireland  191,693,300     Netherlands 63,355,100 

Germany 87,357,000     Italy 56,302,900 

Belgium 73,422,800     France 34,169,500 

(These  tables  and  the  remarks  on  the  wheat  market  are  based  on  chapter 
XII  of  Professor  L.  H.  D.  Weld's  excellent  book,  The  Marketing  of  Farm 
Products.) 


These  figures  show  that  the  large  importers  are  confined 
to  a  small  place  in  western  Europe.  Liverpool  is  the  trade 
centre  of  this  consumption  area.  The  exporting  countries 
are  in  both  the  northern  and  southern  hemispheres;  their 
crops  mature  in  different  seasons.  The  following  table 
shows  the  sources  of  the  Liverpool  market  wheat  receipts 
throughout  the  year: 

To  Liverpool   in   January         from  Australia. 


February 

Australia,  Argentina. 

March 

Australia,  Argentina. 

April 

'     Argentina. 

May 

• 

June 

'     India. 

July 

'     India. 

August 

India,  United  States. 

September 

United  States,  Russia. 

October 

United  States,  Russia,  Canada 

November 

Russia,  Canada. 

December 

'     Canada, 

128  Introduction  to  Economics 

Wheat  may  be  bought  and  sold  prior  to  its  production, 
may  be  transported  any  distance,  may  be  stored  through 
time,  matures  at  different  times  throughout  the  year,  and 
from  exporting  countries  it  diverges  toward  a  common 
centre  at  Liverpool.  What  is  more  natural  than  that  a 
highly  organized  wheat  market  should  grow  out  of  these 
conditions?  The  Liverpool  market  may  better  be  termed 
a  world  market  because  in  it  the  influences  of  supply  and 
demand  are  international  in  scope  and  operate  toward  a 
uniform  price. 

5.  Transporting  Costs  Taken  into  Account. — The  Chi- 
cago or  Minneapolis  price  of  wheat  is  approximately  that 
of  the  Liverpool  price,  minus,  of  course,  the  cost  of  insur- 
ance, freight,  handling,  etc.  Were  the  Chicago  price  ap- 
proximately as  high  as  the  Liverpool  price  no  American 
would  export  his  wheat.  But  we  produce  a  surplus  be- 
yond our  needs  and  the  competition  of  sellers  pushes  down 
the  price,  making  it  profitable  to  export  to  Liverpool.  We 
are  each  year  on  an  "export  basis";  that  is  to  say,  we  find 
it  profitable  to  export,  because  we  have  a  surplus. 

6.  The  Demand  at  Liverpool. — The  Liverpool  demand  is 
an  aggregate  of  the  offers  of  consumers  who  buy  directly 
or  indirectly  through  that  market.  One's  demand  is  in- 
tense in  proportion  to  his  desire,  coupled  with  his  ability 
and  willingness  to  pay.  The  market  demand  for  wheat  is 
somewhat  elastic,  for  if  the  price  is  too  high,  rye,  barley, 
and  other  substitutes  would  be  used;  small  variations  in 
price  would  occasion  large  variations  in  the  volume  of 
sales.  The  demand  for  foreign  wheat  would  diminish  if 
the  importing  countries  were  blessed  with  a  large  crop. 
Or  in  case  these  nations  are  impoverished  by  war,  the  de- 
mand will  diminish,  because  the  people  will  have  but  lit- 


Market  and  Price  129 

tie  purchasing  power.  A  shortage  of  crop  in  Russia  and 
Canada  will  operate  to  increase  the  price  of  wheat  from 
other  parts  of  the  world,  because  prices  must  be  forced 
high  enough  to  induce  a  larger  shipment  from  other  coun- 
tries. Liverpool  can  get  wheat  in  any  case  only  by  out- 
competing  the  potential  buyers  in  the  exporting  countries. 
In  1 9 14-15  the  United  States  and  Argentina  had  a  large 
surplus  of  wheat.  Russia's  surplus  could  not  get  through 
the  Dardanelles;  Canada  and  India  had  small  crops,  and 
Australia's  crop  was  a  failure.  There  was  an  international 
play  of  forces  which  brought  high  prices  to  the  American 
farmer. 

The  suppliers  and  demanders  throughout  the  countries 
above  mentioned  compose  a  single  group  of  exchangers 
within  which  agreements  are  reached  as  to  the  price  of  a 
particular  commodity.  This  fulfils  all  the  requirements  of 
a  market.  The  expression,  a  world  market  for  wheat,  is 
justified. 

7.  The  Communication  of  Information. — We  have  men- 
tioned transportation  or  the  movement  of  commodities  as 
essential  to  a  broad  market.  But  it  must  be  kept  in  mind 
that  a  market  implies  intimate  business  relations,  a  meet- 
ing of  the  minds  of  buyers  and  sellers  with  respect  to  the 
price  of  commodities  dealt  in.  The  submarine  cable  brings 
Liverpool  and  the  Chicago  wheat-pit  together,  and  it 
unites  Liverpool  and  New  Orleans  with  respect  to  cotton. 
Conditions  of  transportation  and  the  communication  of 
information  are  essential  to  the  idea  of  a  market.  These 
conditions  are  essential  to  the  converging  of  influences 
toward  a  market  price.  Without  these  conditions  each 
community  would  have  its  own  independent  market,  but 
with  the  perfection  and  extension  of  the  agencies  of  com- 


130  Introduction  to  Economics 

munication  the  market  broadens.  Local  markets  lose  their 
independence  with  the  broadening  and  uniting  of  the  com- 
munity of  interests. 

Frequent  publications  of  statistical  and  other  informa- 
tion bearing  upon  both  the  present  supply  and  the  prob- 
able future  supply  are  of  great  aid  to  a  group  of  exchang- 
ers. To  the  extent  that  such  information  is  complete, 
man  may  reason  rather  than  guess  on  turns  in  price.  The 
tendency  toward  gambling  is  repressed,  and  we  have  the 
wholesome  effect  of  an  approximation  toward  uniform 
prices  through  time. 

8.  Market  Ratios  and  Price. — The  market  ratios  of  ex- 
change taken  as  a  whole  can,  of  course,  neither  rise  nor 
fall.  If  to-day  one  ox  will  exchange  for  twenty  sheep, 
whereas  yesterday  one  ox  exchanged  for  twenty-five  sheep, 
we  must  say  that  relative  to  the  sheep  the  ox  has  gone 
down,  or  relative  to  the  ox  the  sheep  have  gone  up.  Thus 
we  know,  both  cannot  rise  or  fall  at  the  same  time  in 
relation  to  each  other;  and  what  is  true  of  the  ox  and 
sheep  holds  for  all  commodities.  All  commodities  cannot 
simultaneously  rise  or  fall  in  relation  to  each  other,  yet 
they  may  rise  or  fall  in  relation  to  any  one  among  the 
number.  If  cattle  be  the  species  of  commodity  selected, 
commodities  in  general  may  rise  or  fall  in  relation  to  cat- 
tle. The  exchange  ratios  of  other  commodities  to  one 
selected  commodity  are  their  prices.  Prices  are  generally 
expressed  in  terms  of  money,  "yet,"  says  F.  A.  Walker, 
"it  is  equally  correct  to  say  that  the  price  of  a  horse  is 
seventy-five  bushels  of  wheat,  as  to  say  that  it  is  $100." 
And  we  may  add  that  while  seventy-five  bushels  of  wheat 
is  the  price  of  the  horse,  the  horse  is  the  price  of  seventy- 
five  bushels  of  wheat.     In  every  exchange  there  are  two 


Market  and  Price  131 

prices;  if  one  exchanges  his  dog  for  a  fighting-cock,  the 
price  of  the  fighting-cock  is  the  dog,  and  the  price  of  the 
dog  is  the  fighting-cock. 

Despite  the  fact  that  price  is  the  amount  of  one  com- 
modity given  in  exchange  for  another,  we  usually  think  of 
price  in  terms  of  money.  The  money  price  of  a  thing  is 
nothing  more  or  less  than  the  amount  of  money  given  in 
exchange  for  that  thing.  From  childhood  we  are  accus- 
tomed to  the  use  of  money,  we  think  in  terms  of  it,  adjust 
our  dealings  to  it,  evaluate  commodities  in  terms  of  it. 
We  all  speak  a  common  language,  or  know  precisely  what 
is  meant  when  talking  in  terms  of  money.  Money  is  the 
one  form  of  wealth  generally  acceptable  in  exchange.  Its 
common  use  and  general  exchangeability  as  between  all 
classes  in  the  community  make  it  practical  and  necessary 
to  speak  of  prices  in  terms  of  money. 

9.  The  market  price  is  the  equating-point  between  mar- 
ket supply  and  market  demand  in  a  market.  This  mar- 
ket price  tends  to  bring  all  individual  prices  in  conformity 
with  itself.  If  one  could  market  his  corn  at  $1  a  bushel 
he  would  not  sell  to  his  neighbor  at  90  cents,  and  his 
neighbor  would  refuse  to  pay  $1.10  could  he  buy  in  the 
market  at  $1. 

10.  The  problem  of  price  is  to  explain  the  price  move- 
ments which  cause  goods  to  be  cheap  or  dear.  Business 
men  become  expert  in  forecasting  the  prices  of  certain 
commodities.  The  cotton-speculator  has  an  office  equipped 
with  every  device  for  obtaining  information  which  may 
affect  the  price  of  cotton.  As  a  specialist  on  cotton  his 
judgment  regarding  movements  in  the  price  of  steel  may 
be  worth  little  or  nothing.  But  he  has  at  his  finger's  end 
a  knowledge  of  the  influences  behind  the  supply  of  and  the 


132  Introduction  to  Economics 

demand  for  cotton.  He  knows,  for  instance,  of  the  prob- 
able need  of  cotton  for  explosives,  of  changes  in  fashions, 
of  the  use  of  substitutes  for  cotton;  if  there  has  been  a 
storm  in  India,  or  a  flood  in  Brazil,  or  a  boll-weevil  pest 
in  Texas,  or  a  shortage  of  cars,  or  an  attempt  to  corner  the 
market,  or  a  strike  at  the  cotton-mills,  or  a  blockade  around 
the  Liverpool  market,  he  knows  both  the  fact  and  its 
probable  influence  on  the  price.  The  business  man  is 
interested  primarily  in  one  or  two  commodities  and  can 
forecast  the  prices  with  surprising  accuracy. 

The  economist's  task  goes  deeper;  he  must  explain  the 
ultimate  forces  back  of  price  movements  in  general.  The 
task  of  the  business  man  is  easier  because  he  searches  into 
the  narrow  range  of  facts  bearing  directly  upon  his  special 
field  of  interest.  Moreover,  he  assumes  in  the  beginning 
fundamental  propositions  which  the  economist  must  prove. 
The  economist  approaches  this  problem  through  an  analy- 
sis of  the  ultimate  forces  behind  supply  and  demand. 
Also  he  is  compelled  to  explain  movements  in  the  purchas- 
ing power  of  money  because  the  prices  of  goods  are  ex- 
pressed in  money,  and  must  therefore  vary  with  the  pur- 
chasing power  of  money. 

ii.  The  price  level,  or  general  average  of  the  prices  of 
commodities,  if  accurately  kept  through  a  period  of  years, 
is  a  basis  for  determining  the  movements  in  the  general 
purchasing  power  of  a  dollar.  But  the  formulation  of 
price  levels  through  a  series  of  years  is  in  no  sense  an  ex- 
planation of  price  movements.  The  prices  averaged  to 
obtain  a  price  level  simply  register  the  results  of  former 
price  movements.  What  caused  these  prices  to  be  as  they 
are?  This  question  puts  the  problem;  it  sets  the  task  of 
a  search  into  the  nature  and  causes  of  the  movements  back 


Market  and  Price  133 

of  price.  There  are  many  careful  students  who  diligently 
collect  price  statistics  over  a  period  of  years  and  by  means 
of  index  numbers  formulate  these  data  into  price  levels. 
This  is  excellent  and  needed  work.  But  they  delude  them- 
selves by  terming  it  an  explanation  of  price  movements 
when,  in  fact,  it  is  but  a  statement  of  the  course  of  price 
movements. 

12.  Price-Making. — In  the  market  demands  are  made 
and  goods  are  offered  for  sale.  One  observes  that  trade 
takes  place  at  prices  agreed  on  in  the  process.  He  ob- 
serves further  that  higher  prices  attract  more  sellers  and 
that  lower  prices  attract  more  buyers.  He  sees  that  when 
prices  are  high  keen  competition  among  the  sellers  pushes 
the  price  down,  and  that  when  prices  are  low  keen  com- 
petition among  buyers  pushes  the  price  up.  What  he  does 
not  see  are  the  subtle  and  real  but  unexpressed  marginal 
desirabilities  limiting  or  fixing  the  lowest  figure  below 
which  the  sellers  will  not  part  with  their  goods,  and  the 
upper  limit  to  the  bids  of  the  buyers.  Whatever  the  hid- 
den facts  may  be,  however,  the  bald  fact  stands  out  that 
the  expressed  supply  and  demand,  the  actual  and  disclosed 
figures  of  the  buyer  and  selbr  fix  the  market  price.  The 
market  price,  as  above  noted,  is  the  point  at  which  mar- 
ket supply  and  market  demand  are  equated. 

13.  Conditions  of  Price-Making. — We  may  briefly  out- 
line the  usual  conditions  under  which  prices  are  made.1 

I.     One  seller  without  a  limit  below  which  he  will  not  sell: 

(1)  One  seller,  one  non-reproducible  good,  one  buyer. 

(2)  One  seller,  one  non-reproducible  good,  several  buyers 

(one-sided  competition). 

1  Monopoly  prices  will  be  discussed  in  another  connection. 


134  Introduction  to  Economics 

(3)  One  seller,  a  number  of  non-reproducible  goods,  several 
buyers  (one-sided  competition). 

II.     One  seller  with  a  limit  below  which  he  will  not  sell: 

(1)  One  seller,  one  non-reproducible  good,  one  buyer. 

(2)  One  seller,  one  non-reproducible  good,  several  buyers 

(one-sided  competition). 

(3)  One  seller,  a  number  of  non-reproducible  goods,  several 

buyers  (one-sided  competition). 

(4)  One  seller,  a  number  of  reproducible  goods,  a  number 

of  buyers  (one-sided  competition). 

III.  A  number  of  sellers  with  a  limit  below  which  they  will  not 

sell: 

(1)  A  number  of  sellers,  a  number  of  reproducible  goods. 
one  buyer  (one-sided  competition). 

IV.  Two-sided  competition: 

(1)  A  number  of  sellers,  a  number  of  reproducible  goods,  a 
number  of  buyers. 

I.  One  seller  without  a  limit  below  which  he  will  not  sell. 
(1)  If  in  a  forced  sale  there  be  one  non-reproducible  good, 
such  as  a  rare  antique,  it  is  evident  that  if  but  one  buyer 
presents  himself  the  price  may  be  made  at  a  very  low  fig- 
ure. Something  must  be  allowed  for  bluff,  for  a  pretense 
of  hidden  facts  on  the  part  of  the  seller,  and  for  skill  at 
bargaining. 

(2)  But  the  case  will  be  very  different  with  respect  to 
price  if  a  number  of  buyers  present  themselves  in  compe- 
tition for  the  rare  antique.  Figure  1  is  designed  to  repre- 
sent the  buyers  by  the  symbols  B1,  B2,  B3.  Their  maximum 
subjective  offers  of  $4,  $3,  $2  are  given  for  the  corres- 
ponding symbols.  The  seller  has  no  limit  below  which 
he  will  not  sell,  but,  of  course,  he  is  anxious  to  obtain  the 
largest  figure  he  can.     The  three  bidders  may  start  with 


Market  and  Price 


135 


U 

$4 

$3§ 
R 

£3      B2      Bl 

.Bidders 

Figure 

i 

low  offers,  each  bidding  above 
the  others  until  the  $2  is  reached. 
Beyond  this  point  B3  refuses  to 
go,  leaving  the  competition  to 
B1  and  B2.  These  continue  the 
contest,  neither  knowing  the  oth- 
er's maximum  subject  offer,  un- 
til B2's  maximum  limit  of  $3  is 
reached.     The  price  will  fall  at 

the  point  of  B^s  last  bid,  which  will  be  somewhere  be- 
tween $3  and  $4. 

(3)  In  case  one  seller  is  forced  to  sell,  for  anything  they 
will  bring,  a  collection  of  antiques  (which  are  approximately 
the  same  in  all  respects)  to  a  number  of  buyers,  a  very  dif- 
ferent situation  arises.  The  seller  may  adopt  either  of 
two  policies:  he  may  conceal  his  supply,  offering  for  sale 
but  one  unit  at  a  time,  or  he  may  offer  the  total  supply  at 
one  time.  In  the  former  case  each  transaction  will  be 
carried  through  as  indicated  in  Figure  1.  But  suppose 
there  are  five  units,  five  meteoric  stones  approximately 

equal  in  all  respects,  of- 
fered at  one  time  to  six 
competitors.  If  we  con- 
struct a  figure  (Figure 
2)  on  a  similar  plan  to 
that  of  Figure  1,  B6  will 
be  first  to  drop  out  in  the 
bidding.  Now,  if  we  as- 
sume that  one  buyer  will 
take  one  unit  there  will 
be  left  five  buyers  for  the 
five  units.     Since  all  are 


C 


D 

$8 


-$6 


B6    2?,4   B3    Br    B1 
Bidders 

Figure  2 


31 
83 
B 


136  Introduction  to  Economics 

to  be  sold  the  price  cannot  go  above  $4,  because  B5  would 
drop  out,  leaving  only  four  purchasers.  The  price  will  be 
fixed  at  $4,  or  between  $3  and  $4.  All  of  the  units  would 
sell  at  the  same  price,  because  at  any  one  time  similar 
units  are  not  treated  differently  in  the  market.  Like  por- 
tions of  a  supply  in  the  same  market  at  the  same  time  sell 
at  the  same  price,  regardless  of  the  degree  of  desirability 
which  may  accompany  each  such  portion.  If  one  unit  is 
held  for  a  lower  price  the  competition  of  bidders  will  raise 
its  price;  if  one  unit  is  held  for  a  higher  price  the  want  of 
competition  among  bidders  will  lower  its  price.  Free  com- 
petition means  uniformity  of  price  under  uniform  condi- 
tions. 

77.  One  seller  with  a  limit  below  which  he  will  not  sell. 
(1)  If  the  seller  of  a  non-reproducible  good,  for  instance 
the  original  production  of  an  old  artist,  refuses  to  part 
with  his  good  for  less  than  $2,000,  a  sale  is  conditioned  on 
the  payment  of  that  sum  or  more.  Should  one  buyer  with 
a  maximum  subjective  offer  of  $3,000  present  himself  a 
sale  will  be  made.  The  price  will  be  fixed  at  $2,000  or 
$3,000,  or  more  than  likely  between  these  limits.  Skill  at 
bargaining  will  have  much  to  do  with  the  fixing  of  the 
price. 

Figure  3  is  designed  to  represent  the  buyer  by  the  sym- 
bol B'  and  the  seller  by  the  symbol  S.  The  limit  below 
which  S  will  not  sell  and  the  maximum  offer  of  B'  are 
given  for  the  corresponding  symbols.  The  figure,  I  take 
it,  is  self-explanatory,  indicating  as  it  does  that  if  skill  at 
bargaining  be  approximately  equal  as  between  S  and  B, 
the  price  will  fall  at  or  near  $2,500. 

(2)  Suppose,  however,  that  S  has  widely  advertised  his 
rare  production   and   that   a   number   of  buyers  present 


Market  and  Price 


137 


themselves  in  competition  for 
it.  We  are  now  presented  with 
a  situation  of  common  occur- 
rence, where  a  seller  with  a  re- 
serve price  parts  with  his  good 
under  the  condition  of  one- 
sided competition.  Again  we 
may  resort  to  the  aid  of  a  fig- 
ure which  will  visualize  the 
transaction.  Figure  4  is  con- 
structed according  to  the  plan  of  Figure  3.  We  have 
here  represented  one  seller  with  a  reservation  price  of 
$2,000,  and  six  buyers  whose  maximum  offers  range  from 
$1,000  to  $6,000.  A  sale  will  be  made  because  there  are 
buyers  willing  to  pay  more  than  S  holds  as  a  reserve  price. 
But  where  will  the  price  be  fixed?  Competition  between 
buyers  must  answer  this  question.  Competitive  bidding 
will  first  eliminate  B6,  and  as  it  progresses  B5,  B4,  B3  will 
successively  drop  out.  B2  and  B1,  neither  knowing  what 
the  other  may  have  "up  his  sleeve,"  remain  in  the  contest. 
B2,  however,  drops  out  the  moment  that  the  maximum 

which  he  would  pay 
D  ($5,000)  is  passed.  This 
leaves  the  price  to  be 
fixed  at  any  bid  which 
B1  may  make  above 
$5,000. 

(3)  A  seller  may  have 
a  number  of  non-repro- 
ducible goods,  alike  in 
all  respects,  which  he 
would  not   sell  below   a 


— - — ($2000 

31000 


..$6000 
--$5000 
--$4000 
--$3000 


B"    Bb    B4    B3    SJ    B1 

Figure  4 


B 


138 


Introduction  to  Economics 


c 


Seller's  supply 


L 


D 

SGOOO 
$5000 
$4000 
$3000 
$2000 


certain  figure.  Assume  that  he  has  a  reserve  price  of 
$2,000  on  each  of  five  such  goods,  and  that  six  bidders 
enter  into  competition  for  them.  As  in  paragraph  3, 
under  the  heading,  "One  seller  without  a  limit  below  which 
he  will  not  sell,"  this  seller  may  have  either  of  two  selling 
policies;  he  may  conceal  the  supply  and  offer  for  sale  but 
one  unit  at  a  time,  or  he  may  offer  the  whole  supply  at 
one  and  the  same  time.     Assuming  that  each  buyer  will 

take  but  a  single  unit  in  any 
case,  we  may  proceed  to  ex- 
plain by  aid  of  the  accom- 
panying Figure  5.  If  we  as- 
sume a  policy  of  selling  one 
unit  at  a  time  the  above 
description  accompanying 
Figure  4  will  show  that  the 
price  of  the  first  unit  sold  will 
be  above  $5,000,  with  $6,000 
as  a  maximum.  The  second 
unit  will  be  above  $4,000,  with  $5,000  as  a  maximum;  the 
third  $3,000  to  $4,000;  the  fourth  $2,000  to  $3,000,  and  the 
fifth  will  be  exactly  $2,000. 

If  all  are  thrown  on  the  market  at  one  time  they  must 
sell,  as  we  have  seen,  at  one  uniform  price.  (See  para- 
graph accompanying  Figure  2  above.)  This  price  could 
not  be  below  the  seller's  reserve  price  of  $2,000,  nor  could 
it  be  higher  than  $2,000,  because  there  would  be  only  four 
buyers  willing  to  pay  more  than  $2,000. 

(4)  The  case  of  one  seller  of  a  number  of  reproducible 
goods  to  a  number  of  buyers  presents  the  case  of  a 
selling  monopoly.  Monopoly  price  holds  such  a  con- 
spicuous place  in  economics  that  it  is  thought  best  to  re- 


Ba   B*    B*   B3   B*    Bl 

Figure  5 


$1000 
B 


Market  and  Price 


139 


serve  space  for  more  detailed  discussion  in  the  following 
chapters. 

III.  A  number  of  sellers  with  a  limit  below  which  they 
will  not  sell,  (i)  A  number  of  sellers  may  actively  com- 
pete in  the  selling  of  a  number  of  commodities  similar  in 
all  respects.  They  may  or  may  not  have  a  limit  below 
which  they  will  not  sell.  It  is  termed  a  buying  monopoly 
when  they  have  to  sell  to  a  single  purchaser.  This  point 
must  await  its  turn  for  consideration.  It  is  called  two- 
sided  competition  when  they  compete  in  selling  to  a  num- 
ber of  competing  buyers. 

IV.  Two-sided  competition,  (i)  The  selling  of  a  number 
of  like  commodities  by  a  group  of  competing  sellers  to  a 
group  of  competing  buyers  is,  as  above  stated,  two-sided 
competition.  This  represents  the  usual  manner  of  buy- 
ing and  selling  on  the  market.  We  have  seen  that  as  the 
price  is  lowered  the  number  of  sales  is  increased  in  two 
ways:  (a)  More  buyers  come  into  the  market,  (b)  each 
buyer  may  take  a  larger  number  of  goods.  The  reverse  of 
this  is  true  in  case  the  price  is  raised.  The  sellers,  in  turn, 
will  throw  a  larger  supply  on  the  market  with  a  rise  in 
price,  and  vice  versa.     This  may  be  indicated  as  follows: 


Demand  scale  for  bushels  of  wheal 

Bushels 
At  $0.80  buyers  will  purchase  20,000 

19,000 
17,500 
16,000 
14,000 
12,500 
1 1 ,000 
9,000 

7,5°° 
5,000 


It 

.81 

It 

.82 

it 

•S3 

it 

.84 

It 

•8S 

tt 

.86 

tt 

.87 

tt 

.88 

<( 

.89 

it 

.90 

it 
it 


Supply  scale  of  bushels  of  wheat 

Bushels 
At  $0.80  sellers  will  supply    2,000 


.81 

it 

a 

a 

5,000 

.82 

ti 

a 

a 

7>5°° 

•83 

tt 

a 

a 

9,000 

.84 

a 

a 

a 

1 1 ,000 

•85 

a 

a 

tt 

12,500 

.86 

a 

a 

tt 

14,000 

.87 

tt 

a 

tt 

16,000 

.88 

a 

a 

a 

17,500 

.89 

a 

a 

a 

19,000 

.90 

tt 

a 

tt 

20,000 

140 


Introduction  to  Economics 


N 


90 


87 

•■A 

|  86 

S, 

8  84 


83 


82 


81 


80 


(2)  The  above  supply  and  demand  scales  may  be  graphi- 
cally represented  by  superimposing  one  curve  upon  the 
other  (Figure  6).  The  distance  from  the  point  of  inter- 
section of  the  supply  and  demand  curves,  X,  to  the  base 

line  PO  is  equal  to 
the  price,  85  cents, 
which  free  compe- 
tition establishes; 
the  length  of  the 
price  line  repre- 
sents the  number 
of  bushels  sold  at 
the  competitive 
price.  The  inter- 
section of  these 
curves  marks  the 
equating-point  of 
market  supply  and 
demand.  The  mar- 
ket tends  to  be  per- 
manent; the  market  price  of  uniform  goods  at  any  one  time 
is  the  same  price  (like  goods  in  the  same  market  at  the  same 
time  sell  at  the  same  price),  but  there  is  no  continuous 
price.  Each  trade  represents  a  distinct  and  separate  price. 
Price  curves  are  drawn  to  show  movements  of  the  prices 
of  particular  articles  through  time.  Such  curves,  however, 
must  not  be  interpreted  as  picturing  continuous  prices; 
they  show  but  a  succession  of  individual  prices. 


\s> 

Pric 

e    lir 

ie 

*v 

4 

V 

A 

V 

8      10     12     14 
1,000  Bushels 

Figure  6 


16     18     20     o 


Market  price  refers  to  one  species  of  commodity.  Mar- 
ket demand  equals  the  amount  of  one  species  of  commod- 
ity that  will  be  purchased  at  the  market  price,  and  market 


Market  and  Price  141 

supply  equals  the  amount  that  will  be  sold  at  that  price. 
That  is  to  say,  market  supply  and  market  demand  are 
equal  (the  amount  sold  is  equal  to  the  amount  bought) 
and  that  market  price  is  the  equating-point  between  them. 
Should  the  price  be  arbitrarily  marked  up  to  86  cents  (see 
Figure  6)  there  will  be  fewer  who  are  anxious  to  buy  and 
more  who  are  anxious  to  sell,  or  if  marked  down  to  84 
cents  then  more  would  be  anxious  to  buy  and  fewer  anxious 
to  sell.  Such  would  destroy  the  equilibrium  between  sup- 
ply and  demand. 

Under  free  competition  the  price  would  automatically 
revert  to  the  point  of  equality  between  market  supply  and 
market  demand.  The  market  price  is,  under  active  com- 
petition, precisely  at  a  point  or  margin  of  both  market 
supply  and  market  demand.  The  same  point  (market 
price)  marks  the  margin  for  both  sides  of  the  market  equa- 
tion. At  this  point  of  85  cents  in  a  nicely  adjusted  mar- 
ket there  are  indifferent  buyers  and  sellers;  sellers  who  will 
withdraw  if  the  price  drops  a  fraction,  buyers  who  will 
withdraw  if  the  price  rises  a  fraction.  These  least  eager 
buyers  and  sellers  are  strictly  marginal  buyers  and  sellers. 
These  have  been  inaptly  termed  the  marginal  pair  (the 
least  eager  buyer  and  seller),  as  if  there  could  be  but  one 
such  person  on  either  side  of  the  market.  There  may  be 
any  number  on  either  side  of  the  market  barely  willing  to 
exchange  at  this  point. 

A  buyer  and  seller  in  the  market  trade  at  one  market 
price.  This  allows  a  margin  of  advantage  for  the  sellers 
who  would  take  less  and  for  buyers  who  would  pay  more. 
At  a  market  price  of  85  cents  there  is  a  margin  of  advan- 
tage of  5  cents  for  those  buyers  who  would  pay  90  cents, 
also  there  is  a  margin  of  advantage  of  5  cents  for  those 


142  Introduction  to  Economics 

sellers  whose  reservation  price  is  80  cents.  The  buyer's 
margin  of  advantage  is  equal  to  the  difference  between 
what  he  does  pay  and  the  maximum  which  he  would  pay 
rather  than  forego  the  good,  whereas  the  seller's  margin 
of  advantage  is  the  difference  between  the  market  price 
of  the  good  and  his  reservation  price.  The  surplus  desir- 
ability thus  acquired  is  the  gain  or  product  of  trading. 

14.  Exercises. — 1.  Does  a  large  congregation  of  people 
among  whom  goods  are  exchanged  by  barter  constitute  a 
market  ? 

2.  Assume  that  a  local  merchant  contracts  with  a  farmer 
to  take  his  total  supply  of  cotton  at  the  end  of  the  season, 
paying  for  it  the  market  price  prevailing  at  the  time  the 
cotton  is  marketed,  and  that  he  allows  the  farmer  to  take 
goods  from  his  store  prior  to  the  maturity  of  the  crop,  and 
that  he  agrees  to  pay  the  farmer  the  residue  in  money 
after  the  crop  is  gathered.  Is  this  purchase  made  in  a 
market?  If  so,  is  the  market  any  particular  place?  If 
not,  what  is  the  market? 

3.  Assume  that  the  cotton  mentioned  in  the  above 
question  is  sold  by  the  local  merchant  to  a  New  Orleans 
merchant,  and  resold  by  the  latter  in  a  cotton  exchange. 
Do  these  different  exchanges  take  place  in  the  same  mar- 
ket? 

4.  Is  Montgomery  Ward  &  Co.  a  market  or  many  mar- 
kets ?  If  a  market,  or  markets,  what  is  the  location  ?  Is 
the  wheat  market  located  at  Minneapolis,  or  Chicago,  or 
Liverpool,  or  does  it  have  a  location?  What  is  meant  by 
a  "world  market  for  wheat?" 

5.  Tell  what  is  meant  by  the  italicised  phrases  in  the 
following:  All  produce  for  the  market;  he  has  gone  to  the 
market;  government  control  spoiled  the  market  for  this 
product;  advertising  created  a  market  for  Pears'  soap;  the 
money  market  is  dull;  a  central  city  market  tends  to  lower 
prices. 


Market  and  Price 


143 


6.  Define  the  word  market,  and  show  its  function,  as 
you  have  denned  it,  in  the  industrial  world. 

7.  What   is   a   market   price?     Are   all   prices   market 
prices  ? 

8.  Is  the  problem  of  price  the  same  as  finding  the  price 
level  ? 

9.  Summarize  the  conditions,  as  mentioned  in  the  lat- 
ter part  of  this  chapter,  under  which  prices  are  made. 

10.  What  would  be  the  market  price  of  wheat  under  the 
following  conditions  of  supply  and  demand: 


Demand  scale  for  bushels  of  wheat 

Bushels 
At  $0.40  buyers  will  purchase  10,000 


4i 
42 
43 
44 
45 
46 

47 
48 

49 
So 


<( 

cc 

(< 

cc 

tt 

<< 

It 

<< 

«( 

(1 

CI 

cc 

cc 

<( 

CC 

<( 

C( 

<( 

« 

(( 

9.500 
8,750 

8,000 
7,000 

6,250 

5.500 
4,500 
3,750 
2,500 

1,000 


Supply  scale  of  bushels  of  wheat 

Bushels 
At  $0.40  sellers  will  supply    1 ,000 


4i 
42 
43 
44 
45 
46 

47 
48 

49 

50 


2,500 
3,750 
4,500 
5,5oo 
6,250 
7,000 
8,000 
8,750 
9,500 
10,000 


CHAPTER   VIII 
VALUE  AND  DEMAND 

i.  Price,  a  restatement.  2.  Value.  3.  Value  is  an  individualistic  mat- 
ter. 4.  "The  paradox  of  value."  5.  Surplus  and  the  limit  to  exchanges. 
6.  Decision  in  directing  expenditures.  7.  Valuation.  8.  Caution  in  the 
use  of  supply  and  demand.  9.  Amount,  supply.  10.  Price-making  illus- 
trated, n.  Market  demand  and  market  supply.  12.  Definitions  illus- 
trated. 13.  Unrevealed  price  limits  of  buyers  and  sellers.  14.  Elasticity 
of  market  demand.  15.  Complementary  goods.  16.  Prospective  prices 
and  present  demand.  17.  Demand  cuive.  18.  Demand:  questions  and 
answers.     19.  Recapitulation.     20.  Exercises. 

i.  Price,  a  Restatement. — The  preceding  chapter  had 
to  do  with  the  making  of  exchanges  in  a  market,  and 
showed  that  in  every  exchange  a  price  emerges.  It  should 
now  be  clear  that  there  is  no  such  thing  as  price,  apart 
from  an  exchange  of  one  thing  for  another.  Shoes  are 
exhibited  for  sale  and  marked  $8,  $10,  and  $15  a  pair. 
Are  these  figures  prices?  They  are  not,  although  we  so 
speak  of  them  in  common  parlance;  they  are  no  more  than 
the  exhibited  offers  of  the  merchant.  In  the  column  of 
stock  quotations  one  sees  a  certain  stock  offered  at  115, 
and  sees  that  the  maximum  bid  for  it  is  perhaps  only  100. 
Does  a  sale  take  place?  There  is  no  meeting  of  minds  as 
between  buyers  and  sellers;  there  can  be  no  exchange,  and, 
in  consequence,  no  price. 

What  is  price?     The  definitions  of  price  from  the  year 

1 77 1    to    the   present   have,    with   great    diligence,    been 

brought  together  and  classified  by  Professor  F.  A.  Fetter.1 

1The  "  Definitions  of  Price,"  American  Economic  Review,  vol.  XI,  n«»-  4, 
PP.  783-813. 

144 


Value  and  Uemana  145 

The  conclusion  of  this  very  able  contribution,  together 
with  the  weight  of  authority  upon  the  subject,  gives  us 
this  definition:  "Price  is  the  quantity  of  goods  given  or 
received  in  exchange  for  another  good."  F.  A.  Walker 
gives  a  clear  expression  of  this  idea:  " Price  is  purchasing 
power  expressed  in  terms  of  some  one  article;  power-in- 
exchange-for-that-article,  be  the  same  wheat,  or  beef,  or 
wool,  or  gold,  or  silver.  In  common  speech  the  word  price 
brings  up  the  idea  of  money-value,  the  purchasing  power 
of  an  article  expressed  in  terms  of  money.  Yet  it  is  equally 
correct  to  say  that  the  price  is  75  bushels  of  wheat,  as  to 
say  it  is  $100." 

Price  implies  a  quantitative  exchange,  so  many  units  of 
one  thing  given  in  trade  for  another.  If  you  trade  $1  for 
a  cap,  you  give  23.22  grains  of  fine  gold,  or  its  equivalent, 
for  the  cap.  You  may  give  a  unit  of  gold,  or  wheat,  or 
iron  for  the  cap,  but  in  any  case  trade  implies  an  exchange 
of  quantities,  and  price  is  the  quantity  of  one  thing  given 
in  exchange  for  another. 

In  most  cases  price,  as  stated  in  the  preceding  chapter, 
signifies  the  quantity  of  money  paid  for  a  good  or  service, 
but  there  are  numerous  exceptions  to  this.  Country  stores 
usually  ask  two  prices  for  their  goods — the  money-price 
and  the  produce-price.  Coffee  may  be  quoted  at  25  cents 
in  money,  or  at  a  slightly  higher  price  in  butter  and  eggs. 
In  all  barter  transactions  prices  emerge,  although  no 
money  is  handled.  International  trade  is,  for  the  most 
part,  barter,  for  comparatively  little  gold  is  involved  in 
these  transactions. 

Price  is  not  what  would  be  given  if  circumstances  were 
different,  nor  is  it  what  should  be  given.  There  are  no 
"ifs"  or  "shoulds"  about  it;  it  is  the  amount  (quantity) 


146  Introduction  to  Economics 

of  one  thing  which,  in  the  process  of  exchange,  is  given  for 
another  thing. 

The  preceding  chapter  showed  a  price  to  be  at  the  point 
of  equilibrium  between  market  supply  and  market  de- 
mand. Price  can  no  more  be  attributed  to  supply  than 
to  demand,  or  vice  versa.  Demand  stationary,  price 
changes  with  variations  in  supply.  Or  with  supply  fixed, 
price  changes  with  variations  in  demand.  A  full  account 
of  price,  therefore,  can  be  reached  only  through  a  study  of 
supply  and  demand.  Demand,  now  to  be  considered,  is 
based  directly  upon  value  and  valuations.  But  what  is 
value  ? 

2.  Value.  The  word  value  is  burdened  with  a  variety  of 
meanings.  It  is  used  in  the  household  and  market-place, 
in  senses  technical  and  non-technical,  in  works  on  natural 
science  and  social  science  and  in  the  writings  of  popular 
fiction.  We  hear  these  expressions:  the  value  of  heat 
units,  the  value  of  a  word  or  phrase,  valuable  man,  valu- 
able idea  or  suggestion.  In  economic  writings  one  finds 
a  variety  of  different  uses  for  the  word,  such  as  value  in 
use,  value  in  exchange,  social  value,  objective  value,  sub- 
jective value,  and  so  on.  Many  writers  define  the  word 
as  we  have  defined  price,  but  price  implies  an  exchange 
whereas  value  does  not. 

This  term  is  not  limited  to  objects  which  are  for  sale. 
The  following  are  valuable  things,  although  not  for  sale: 
Government  reservations  of  natural  resources;  public 
buildings,  as  the  capitol,  jail,  or  schoolhouse;  parks  and 
highways;  libraries,  museums,  zoological  or  botanical  col- 
lections. Within  this  class,  also,  are  many  private  pos- 
sessions, as  the  picture  of  a  deceased  friend,  grandfather's 
old  pipe,  one's  clothing,  and  keepsakes  of  many  kinds. 


Value  and  Demand  147 

These  things  are  not  market  facts,  are  not  for  sale,  yet  a 
definition  that  denies  value  to  them  would  not,  and  should 
not,  be  taken  seriously. 

We  shall  define  value  as  the  importance  which  one 
attributes  to  an  objective  good  or  service.  As  such  it  is  a 
very  real  subjective  fact,  but  it  is  difficult  to  define  it 
with  exact  quantitative  or  arithmetic  exactness.  An  ap- 
praisal of  things  in  their  quantitative  aspects  is  necessary 
as  a  foundation  for  exchanges  where  a  definite  amount  of 
one  thing  is  given  in  trade  for  a  specified  quantity  of 
another.  The  idea  of  valuation  serves  this  purpose;  we 
will  explain  it  shortly. 

3.  Value  Is  an  Individualistic  Matter.— Being  the  impor- 
tance which  the  mind  attributes  to  a  good  or  service,  value 
is  in  no  sense  to  be  considered  a  part  of  the  good.  It  is  an 
error  to  speak  of  intrinsic  value,  as  though  value  were  a 
quality  of  a  good. 

The  same  good  varies  in  one's  esteem  with  the  change 
of  desire;  "witness  the  frumpy  horror  that  was  last  year  a 
coveted  bonnet."  We  discover  new  qualities  in  goods, 
new  services  to  which  they  may  be  put,  and  these  lead  us 
to  attribute  importance  to  them. 

Around  her  flower-bed  a  lady  had  placed  some  odd- 
shaped  rocks,  which  she  had  found  at  a  river's  side.  A 
visitor  was  attracted  to  one  of  these,  examined  it,  and 
made  her  an  offer  of  $100  for  its  possession.  This  excited 
her  imagination,  and  what  to  her  had  been  but  a  worthless 
ornament  became  a  rare  and  precious  object.  She  refused 
the  offer,  and  refused  each  successive  offer,  except  the  final 
bid,  which  was  $5,000.  A  new  quality  was  discovered  in 
the  rock — it  contained  diamonds.  But  this  she  did  not 
know,  for  the  visitor  never  revealed  the  secret  of  his  find- 


148  Introduction  to  Economics 

ing.  Her  thought  was  that  if  it  were  worth  thousands  to 
the  visitor,  it  must  be  of  great  importance  for  her.  Thus 
value  may  be  attributed  either  because  we  find  a  new 
quality  or  because  we  suspect  such  a  quality  to  exist.  In 
any  case  value  is  subjective;  it  is  a  quality  imputed  to  an 
object. 

Again,  we  may  highly  esteem  a  good  under  one  set  of 
circumstances,  and  a  change  of  conditions,  such  as  new 
inventions  or  styles,  may  largely  diminish  or  destroy  this 
value. 

Moreover,  we  may  highly  prize  an  object  when  we  be- 
lieve it  to  have  desirability,  even  if  such  quality  is  absent. 
At  an  auction  sale  a  box  was  offered  for  what  it  would 
bring.  The  auctioneer  declined  to  say  whether  anything 
was  in  it.  He  asked  for  bids  and  the  highest  offer  was 
$3.75.  On  examination  the  purchaser  found  that  the  box 
was  empty.  That  value  was  attributed  to  the  box,  how- 
ever, cannot  be  denied.  This  but  illustrates  the  fact  that 
value  is  an  attributed  quality.  It  is  natural  for  each  and 
all  to  attribute  less  value  to  things  which  are  plentiful. 
Were  diamonds  as  plentiful  as  glass,  one  would  then 
attribute  no  more  value  to  the  former  than  to  the  lat- 
ter. 

4.  "The  Paradox  of  Value." — If  by  magic  the  supply 
of  necessities,  comforts,  and  conveniences  were  increased 
until  they  became  as  abundant  as  air,  they  would  cease  to 
have  value  attributed  to  them  and  could  command  no 
price.  When  the  total  amount  of  any  good  is  increased 
beyond  a  certain  point,  there  is  a  decrease  in  its  total 
price.  This  fact  is  termed  the  "paradox  of  value."  Great 
abundance  means  great  wealth  whereas  extreme  scarcity 
may  mean  high  price.     If  corn  is  scarce  and  sells  at  a  do! 


Value  and  Demand  149 

lar  a  bushel,  the  total  crop  will  be  worth  more  than  if  it 
were  twice  as  large  and  sold  at  forty  cents  a  bushel,  or  four 
times  as  large  and  sold  at  eighteen  cents  a  bushel. 

When  an  individual  (or  corporation)  controls  a  large 
portion  of  the  amount  of  corn,  wheat,  or  other  commodity, 
it  is  to  his  interest  to  increase  his  output  up  to  a  certain 
point,  and  beyond  that  point  his  self-interest  lies  in  de- 
stroying or  otherwise  limiting  the  supply  in  order  to  in- 
crease its  price.  The  interest  of  the  individual  coincides 
with  social  welfare  so  long  as  it  is  to  his  interest  to  increase 
his  output,  but  he  comes  into  conflict  with  social  welfare 
the  moment  that  his  interest  lies  in  curtailing  the  supply. 
The  paradox  of  value  is  a  significant  practical  problem 
with  which  economists  and  lawmakers  must  deal  in  the 
regulation  of  monopoly  power. 

But  in  competitive  industries  the  case  is  otherwise.  If 
all  crops  are  large  the  total  amount  of  produce  may  have 
a  less  total  price  than  if  the  crops  were  small.  The  indi- 
vidual farmer,  none  the  less,  finds  it  to  his  interest  to  make 
his  output  as  large  as  is  within  his  power.  It  would  be 
unwise  for  him  to  produce  no  crop  or  a  small  crop,  because 
that  would  avail  him  nothing.  He  would  thus  increase 
the  price  for  his  competitors  at  his  own  expense. 

As  for  society,  it  is  now  clear  that  the  per  unit  price  of  a 
good  diminishes  as  the  supply  of  it  is  enlarged;  this  makes 
it  possible  for  a  large  to  have  a  less  total  price  than  a 
small  supply.  As  for  the  individual,  we  have  seen  that 
the  marginal  desirability  of  a  good  diminishes  as  one 
comes  to  possess  more  and  more  of  it.  It  is  in  order  to 
apply  this  principle  in  the  study  of  exchange  transactions. 
We  shall  now  see  that  it  limits  and  directs  such  transac- 
tions. 


150  Introduction  to  Economics 

5.  Surplus  and  the  Limit  to  Exchanges. — Modern  indus- 
try, as  we  have  seen,  is  characterized  by  a  division  of 
labor,  specialization,  and  exchange.  One  can  specialize 
and  devote  his  every  effort  to  the  making  of  hats  because 
he  can  exchange  these  for  the  various  goods  he  may  choose 
to  acquire.  If  there  were  no  exchange  it  is  clear  that  the 
manufacturer  could  not  turn  out  five  thousand  hats  a 
month.  The  division  of  labor  and  specialization  are  made 
possible  by  exchange.  When  one  specializes  in  the  mak- 
ing of  hats  it  must  follow  that  he  will  have  a  surplus  of 
hats  and  a  want  for  other  things.  But  while  he  is  anxious 
to  exchange  his  surplus  for  other  things,  there  is  a  limit  at 
which  he  will  cease  trading.  This  is  the  limit  of  equal 
marginal  desirabilities. 

To  illustrate:  A  has  a  bag  of  salt,  and  B  has  a  bag  of 
rice.  They  meet  in  trade.  Each  demands  what  the  other 
has,  and  each  supplies  what  the  other  has  not.  A  hands 
over  a  pint  of  salt  and  B  hands  over  a  pint  of  rice;  this  is 
repeated  time  after  time.  As  his  supply  of  salt  diminishes 
A  finds  that  the  remaining  units  have  an  increasing  desir- 
ability; he  attributes  a  higher  value  to  them.  And  as  he 
acquires  additional  units  of  rice,  their  marginal  desirabili- 
ties diminish;  he  attributes  less  value  to  each  unit  of 
rice.  Ultimately  he  reaches  the  point  where  the  desirabil- 
ities of  a  unit  of  rice  and  a  unit  of  salt  are  equal.  When 
A  reaches  the  point  of  equality  of  marginal  desirabilities 
he  stops  trading  on  the  old  basis.  B  can  push  the  trad- 
ing further  only  by  offering  more  than  a  pint  of  rice  for  a 
pint  of  salt. 

This  example  illustrates  that  each  buyer  must  also  be  a 
seller,  and  that  each  seller  must  also  be  a  buyer.  There 
are  two  suppliers  and  two  demanders  in  everv  trade.     It 


Value  and  Demand  151 

illustrates  further  that  the  limit  to  one's  trading  is  reached 
at  the  point  of  equality  between  two  marginal  desirabili- 
ties. 

6.  Decision  in  Directing  Expenditures. — Every  purchase 
implies  a  decision  to  buy  on  the  part  of  the  purchaser. 
This  decision  may  be  the  result  of  a  whim,  fancy,  or  im- 
pulse; it  may  be  ill  considered  or  well  considered,  none 
the  less  it  is  a  decision.  The  psychologist  may  bother 
himself,  if  he  wishes,  as  to  the  manner  of  its  origin,  but  the 
economist  takes  the  decision  as  a  fact  and  proceeds. 

Take,  for  example,  the  ladies  at  a  bargain-counter. 
Some  weigh  light  matters  seriously,  complaining  that  they 
cannot  make  up  their  minds.  Others  are  all  but  incapable 
of  decision,  "like  the  ass  between  two  stacks  .  .  .  simply 
stand  and  dodder."  Still  others  have  a  penetration  of 
mind,  making  them  quick  of  perception  and  decision. 
Their  decisions  are  of  nice  discrimination,  are  not  ill  con- 
sidered because  they  are  quick.  One  admires  the  quick, 
yet  accurate  decisions  of  noteworthy  business  men.  Such 
ready  decisions  are  usually  the  result  of  previous  thought 
and  experience  applied  to  specific  cases.  Then,  too,  there 
are  those  in  the  market  who  jump  at  a  decision,  who  de- 
cide like  a  flash  without  deliberation  past  or  present. 

Professor  Hoffding  tells  how  Jeppe,  a  character  in  a 
comedy,  is  addicted  to  drink.  His  wife  has  just  given  him 
money  and  ordered  him  to  buy  soap.  He  knows  that  if 
he  squanders  the  money  his  wife  will  beat  him.  He  delib- 
erates over  the  longing  in  his  stomach  and  the  fear  for  his 
back.  "My  stomach  says  you  shall,  my  back  you  shall 
not."  Desire  plays  its  part  by  minimizing  the  one  and 
magnifying  the  other.  Jeppe  asks  himself:  "Is  not  my 
stomach  more  to  me  than  my  back"?     I  say,  "Yes." 


152  Introduction  to  Economics 

"Yes"  forms  the  decision.  It  is  of  little  consequence 
whether  strong  appetite,  habit,  hunger,  cold,  fancy,  or 
caprice  forms  the  decision;  the  fact  of  economic  conse- 
quences is  that  decision  determines  man's  economic  be- 
havior, determines  the  direction  of  his  expenditure,  deter- 
mines his  every  purchase  in  the  market. 

Every  good  and  service  in  the  market  is  competing  for 
the  purchaser's  dollar.  And,  unfortunately  for  him,  he 
can  spend  his  dollar  but  once.  He  deliberates  between 
the  marginal  desirabilities  of  goods.  The  marginal  desir- 
ability of  a  free  good  is  zero,  that  is  to  say,  it  has  no  mar- 
ginal desirability.  Deliberation  and  choice  as  between 
marginal  desirabilities  of  goods  must  be  limited  to  scarce 
goods.  Only  goods  that  are  valued,  and  not  all  of  these, 
enter  into  an  exchange  economy. 

The  purchaser  has  a  desire  for  goods;  the  different  goods 
which  he  may  purchase  are  the  alternatives  for  the  course 
of  his  action;  he  deliberates  between  these  alternatives  and 
the  result  of  his  deliberation  (decision)  is  to  acquire  one 
good  in  preference  to  another.  Briefly  put,  expenditures 
are  directed  by  a  comparison  between  the  marginal  de- 
sirabilities of  different  goods;  such  comparison  leads  pur- 
chasers to  attribute  different  degrees  of  importance  to 
goods,  and  to  reach  a  resulting  decision  to  buy  one  rather 
than  another. 

7.  Valuation. — The  last  paragraph  showed  us  the  man- 
ner in  which  expenditures  are  directed.  It  is  now  in  order 
that  we  inquire  more  particularly  into  the  manner  in  which 
one  comes  to  offer  his  own  good  or  service  for  that  of 
another.  Of  all  the  goods  competing  for  the  purchaser's 
dollar,  let  us  assume  that  his  preference  is  for  a  pair  of 
gloves.     How  did  he  reach  the  decision  to  part  with  what 


Value  and  Demand  153 

he  has  for  what  he  has  not,  to  give  his  dollar  for  the  gloves  ? 
Subjectively  he  weighed  the  marginal  desirability  of  the 
alternative  use  for  the  dollar  against  that  of  the  gloves. 
If  in  his  own  mind  the  marginal  desirability  of  some  one 
of  the  goods  which  the  dollar  would  buy  had  outweighed 
that  of  the  gloves,  he  would  have  attributed  higher  value 
to  it  and  would  have  decided  to  retain  his  dollar  for  the 
alternative  good  and  to  do  without  the  gloves.  On  the 
contrary,  should  the  importance  of  the  gloves  be  upper- 
most in  his  mind,  he  at  once  comes  to  the  decision  to  offer 
his  dollar  in  exchange  for  the  gloves.  This  subjective 
weighing  of  the  importance  of  one  thing  against  another  is 
called  evaluation,  and  the  decision  to  offer  what  one  has 
for  that  which  he  has  not  is  the  outgrowth  of  the  evalua- 
tion. 

A  valuation,  then,  is  a  subjective  weighing  of  the  impor- 
tance which  one  attributes  to  different  things.  It  may 
take  the  form  of  a  mere  price  appraisal.  For  instance, 
one  has  a  violin  with  which  he  will  not  part  for  less  than 
ioo  bushels  of  wheat  or  $100  in  money,  either  of  these 
sums  will  be  his  price  appraisal,  despite  the  fact  that  there 
may  be  no  purchaser  for  the  violin.  Or  the  poor  man 
might  be  willing  to  pay  $100,000,  if  he  had  it,  for  a  string 
of  matched  pearls.  In  this  case  the  valuation  would  be 
no  more  than  a  hypothetical  price.  Valuation,  or  price 
appraisal,  then,  is  but  the  price  one  would  be  willing  to 
pay  under  certain  conditions,  the  maximum  one  would 
pay  for  a  good,  or  the  minimum  which  he  would  take  in 
case  he  owned  the  good.  From  this  it  is  clear  that  all 
valuations  do  not  lead  to  a  demand  or  offer  to  buy.  One 
may  evaluate  goods  whether  he  has  or  has  not  the  means 
to  buy  them.     Again,  if  I  evaluate  a  good  in  my  posses- 


154  Introduction  to  Economics 

sion  more  highly  than  a  good  which  another  owns,  I  would 
certainly  not  offer  to  trade  with  him.  But  while  all  valu- 
ations do  not  lead  to  offers,  all  offers  arise  from  valuations. 

When  A  and  B  met  in  trade  with  the  salt  and  the  rice, 
each  compared  the  marginal  desirabilities  of  a  unit  of  that 
which  he  had  with  a  unit  of  that  which  the  other  pos- 
sessed. Each  of  the  two  parties  to  the  exchange  of  rice 
for  salt  first  made  a  subjective  valuation  preparatory  to 
making  an  offer.  Thus,  each  trade  implies  two  valuations, 
one  on  the  part  of  each  trader.  The  decision  to  make  a 
demand  or  offer  for  a  good  is,  let  it  be  remembered,  always 
the  result  of  a  valuation. 

8.  Caution  in  the  Use  of  Supply  and  Demand. — "Mar- 
ket prices  are  determined  by  supply  and  demand";  this 
statement  is  so  frequently  encountered  in  the  language  of 
the  business  world  that  we  must  spare  space  to  ascertain 
exactly  what  these  terms  mean.  Demand  must  not  be 
confused  with  desire.  The  humblest  peasant  may  desire 
a  luxurious  home  with  as  much  intensity  as  if  he  were  a 
millionaire,  but  he  could  make  no  demand  for  it.  Desire 
must  be  coupled  with  purchasing  power  before  it  can  be- 
come a  demand.  A  hungry  group  of  impoverished  people 
may  besiege  a  shop  for  bread,  and  yet  be  unable  to  demand 
a  single  loaf.  One  must  have  purchasing  power  before 
he  can  demand  a  meal,  or  a  ride  on  a  train,  or  a  suit  of 
clothes,  or  any  other  salable  thing  on  the  market. 

To  whom  does  a  demand  refer  ?  This  term  is  used  with 
reference  to  the  buyer,  or  would-be  buyer,  who  makes  a 
reasonable  offer  for  a  good.  One  never  demands  his  own 
wares ;  the  thing  demanded  must  always  belong  to  another. 
Demand  must  not  be  confused  with  the  idea  of  the  owner's 
withholding  a  commodity  from  the  market  for  his  own 


Value  and  Demand  155 

use,  or  for  a  higher  price.     Demand  may  be  used  with 
respect  to  an  individual  or  to  a  group  of  buyers. 

To  what  does  demand  refer  ?  It  refers  to  a  certain  arti- 
cle, be  it  potatoes,  or  cotton  cloth,  or  iron,  or  any  other 
particular  good;  there  is  no  such  thing  as  demand  indis- 
criminately for  shoes,  steel  rails,  pianos,  peanuts,  and  all 
other  salable  things  in  the  market.  Nor  does  this  term 
refer  to  a  good  which  is  not  for  sale.  It  is  said  that  there 
is  an  abundance  of  coal  near  the  south  pole.  For  this 
there  is  need,  but  no  demand.  The  government  is  with- 
holding coal  from  the  market.  There  is  a  desire  but  no 
demand  for  this,  for  the  single  reason  that  it  is  not  for  sale. 

On  the  other  hand,  supply  refers  to  the  person,  or  group 
of  persons,  who  offer  a  commodity  for  sale  at  a  reasonable 
price.  It  also  refers  to  a  particular  good,  and  not  to  goods 
indiscriminately. 

It  would  not  be  a  demand  should  one  offer  50  cents  for  a 
piano,  nor  would  your  corn  be  a  portion  of  the  supply, 
should  you  hold  it  for  $10  a  bushel.  Such  absurd  figures 
are  wholly  without  the  reckonings  of  the  market,  they  are 
not  at  all  market  facts  to  which  the  market  terms  of  sup- 
ply and  demand  refer.  It  must  be  remembered  that  sup- 
ply and  demand  refer  to  a  salable  good  which  is  offered  at 
a  figure  neither  too  high  nor  too  low  for  buyers  and  sellers 
to  consider. 

9.  Amount,  Supply. — Assume  an  isolated  community  in 
which  ten  farmers  devote  their  wealth  and  labor  to  the 
growing  of  potatoes.  Each  of  the  ten  produces  1,000 
bushels,  thus  making  a  total  of  10,000  bushels  of  potatoes. 
Without  further  ado,  we  may  speak  of  the  10,000  bushels 
at  the  end  of  the  season  as  the  amount  or  stock  of  pota- 
toes on  hand. 


156 


Introduction  to  Economics 


Each  of  the  producers  will  wish  to  retain,  to  withhold 
from  sale,  a  portion  of  his  stock  for  food  and  for  seed. 
Assume  that  each  withholds  ioo  bushels  for  his  own  use. 
Each  will  thus  have  900  bushels  for  sale,  and  the  ten  will 
have  9,000  bushels  for  sale.  Assuming  that  these  9,000 
bushels  are  for  sale  (some  at  a  reasonably  high,  and  others 
at  a  reasonably  low  price),  we  may  speak  of  them  as  the 
supply.  Supply  is  that  portion  of  the  amount  which  is 
for  sale  at  asking  prices,  such  as  will  fall  within  the  con- 
templation of  buyers  and  sellers. 

10.  Price-Making  Illustrated. — Will  the  whole  supply 
of  9,000  bushels  be  marketed  forthwith?  This  is  very  im- 
probable. The  market  demand  may  be  weak,  and  so,  were 
the  whole  supply  at  once  thrown  upon  the  market,  it  could 
be  sold  only  at  a  very  trifling  figure.  It  is  more  probable 
that  those  producers  who  have  some  money  ahead  will 
prefer  to  sell  none  of  their  stock  until  the  market  improves; 
others  who  are  in  need  of  money  will  sell  only  a  portion  of 
their  supply.  A  weak  market  demand  calls  forth  a  small 
volume  of  sales. 

It  is  evident  that  at  a  high  price  many  would  be  willing 
to  sell,  but  only  a  few  would  care  to  buy.  Buyers  are 
attracted  by  low  prices,  but  these  discourage  sellers.  The 
self-interests  of  buyers  and  sellers  pull  in  opposite  direc- 
tions.    The  following  table  will  serve  to  show  these  facts: 


At  $2.00  purchasers  would  buy  1,000 

bu.  and 

producers 

would  sell 

9,000  bu. 

"     1.80          "              "        "    2,000 

tt         a 

a 

(i 

n 

8,000  " 

"     1.60                         "        "    3,000 

it         it 

a 

tt 

[< 

7,000  " 

"     1.40                                  "     4,000 

tt         it 

tt 

tt 

tt 

6,000  " 

"     1.20                         "       "     5,000 

a          (( 

tt 

<< 

"    5,°oo  " 

"     1. 00          "              "        "    6,000 

it          tt 

a 

tt 

u 

4,000  " 

"       .80          "              "       "    7,000 

ti         it 

tt 

a 

tt 

3,000  " 

"       .60          "              "       "    8,000 

it          it 

tt 

tt 

!< 

2,000  " 

"       .40                                  "    9,000 

it          it 

tt 

tt 

It 

1,000  " 

Value  and  Demand  157 

The  table  shows  that  the  number  of  bushels  that  would 
be  bought  and  the  number  that  would  be  sold  come  to 
equality  at  the  price  of  $1.20.  Could  the  selling  price  be 
fixed  at  any  other  figure?  Could  it  be  at  a  higher  price, 
say  $1.40?  No,  for  the  number  of  bushels  that  would  be 
sold  exceeds  the  number  that  would  be  bought  by  2,000. 
Sellers  could  not  dispose  of  these  2,000  bushels  except  at  a 
lower  figure,  and  they  would  compete,  thus  driving  the 
price  down.  Could  the  price  be  lower  than  $1.20,  let  us 
say,  $1.00?  No,  for  at  this  figure  the  number  of  bushels 
that  would  be  bought  exceeds  the  number  that  would  be 
sold  by  2,000.  The  purchasers  for  this  extra  amount  could 
not  get  it  except  at  a  higher  price,  and  they  would  com- 
pete, thus  driving  the  price  up. 

We  now  see  that,  with  supply  and  demand  as  they  are 
presented  in  the  above  table,  the  price  could  not  be  other 
than  $1.20.  Should  either  the  supply  or  the  demand  vary, 
the  price  would  also  vary.  But  in  every  case  price  is  fixed 
at  the  equating-point  of  these  two  opposing  volumes. 
Although  this  appears  a  very  simple  fact,  many  writers 
fall  into  the  error  of  speaking  as  if  it  were  price  that  deter- 
mines supply  and  demand,  rather  than  the  reverse. 

Is  it  not  frequently  stated  that  "a  high  price  causes  a 
large  supply,"  or  that,  "a  low  price  brings  forth  a  large 
demand?"  It  must  be  emphasized  that  all  prices,  even 
the  prices  of  an  absolute  monopoly,  are  determined  by 
supply  and  demand. 

A  monopoly  first  reckons  upon  the  demand  for  its  prod- 
uct, and  then  seeks  to  control  the  price  by  manipulating 
the  market  supply.  Suppose  that  one  has  a  monopoly 
on  automobiles.  He  knows  that  at  a  low  price  many  cars 
will  be  sold,  that  at  a  medium  price  fewer  will  be  sold,  and 


158 


Introduction  to  Economics 


at  a  high  price  only  a  small  number  will  be  sold.  Suppose 
he  would  wish  to  fix  the  price  at  $500  a  car.  He  could 
not  maintain  this  price  should  he  throw  more  cars  upon 
the  market  than  buyers  would  take  at  this  figure,  for  the 
extra  amount  would  drive  the  price  down.  On  the  other 
hand,  were  he  to  market  only  a  few  cars,  competition 
among  buyers  would  raise  the  price. 

11.  Market  Demand  and  Market  Supply. — The  volume 
sold  must  equal  the  volume  bought;  it  is  impossible  for 
the  purchases  to  exceed  the  sales.  There  is  only  one  point 
at  which  purchases  and  sales  reach  an  equilibrium;  the 
price  fixed  at  this  point  is  called  the  market  price.  This 
volume  which  is  exchanged  (or  equally  the  sum  of  these 
market  prices  which  would  be  paid)  is,  from  the  standpoint 
of  the  buyers,  the  market  demand  and,  from  the  standpoint 
of  the  sellers,  the  market  supply. 

12.  Definitions  Illustrated. — The  following  figure  will 
serve  to  make  clear  the  above  definitions. 


{.From  standpoint  of  buyers) 

Market  demand 
Demand 


(From  standpoint  of  aellera) 

Amount  or  stock  in 
possession 

■Supply  or  that  portion 
of  the  amount  held  for 
reasonable  price 

Market  supply 


Figure  i 


Eggs  upon  your  table  or  those  stored  for  your  personal 
use  are  wholly  out  of  the  market,  are  no  part  of  supply  or 
demand;  they  belong  within  the  area  C  above.  Just  now 
(19 1 9)  the  price  of  eggs  in  New  York  City  is  unprecedent- 
edly  high,  yet  the  storage-houses  are  reported  to  contain 
millions  of  dozens  held  for  a  still  higher  price.     Assuredly 


Value  and  Demand  159 

these  are  a  part  of  the  total  supply,  but  they  are  no  part 
of  the  market  supply;  they  belong  within  the  area  B  in 
the  figure.  The  millions  of  dozens  within  the  stores  are 
subject  to  purchase  and  sale  at  the  market  price;  they  are 
at  once  the  market  supply  and  the  market  demand,  and 
belong  within  the  area  A  above. 

13.  Unrevealed  Price  Limits  of  Buyers  and  Sellers.— In 
the  competitive  market  a  seller  may  have  an  "asking 
price"  and,  in  his  mind,  he  may  have  a  much  lower  price 
limit  (valuation)  which  he  would  take  rather  than  forego 
a  sale.  This  valuation  is  in  reality  the  limit  and  he  will 
retain  possession  of  the  good  rather  than  take  a  lower 
figure.  He  will  welcome  any  offer  which  the  buyer  makes 
above  this  valuation.  He  will  welcome  an  offer  of  $100 
for  his  cow  should  he  be  willing  to  take  $60  rather  than 
forego  a  sale.  A  buyer  likewise  may  make  an  offer  mean- 
while holding  in  mind  an  unrevealed  maximum  beyond 
which  he  will  not  go.  He  will  welcome  anything  lower 
than  his  maximum.  Were  his  upper  limit  $80  for  a  cow 
he  would  consider  it  a  good  fortune  should  he  have  to  pay 
only  $40.  It  is  to  be  noted  that  buyers  and  sellers  may 
not  have  such  limits  definitely  in  mind  (psychologists  say 
they  generally  have  not),  yet  the  fact  remains  that  there 
are  such  limits.  This  fact  of  rational  limitation  to  buying 
and  selling  is  the  only  essential  and  significant  fact  for  our 
purpose.  The  effect  of  unrevealed  price  limits  (valua- 
tions) upon  exchanges  may  be  illustrated. 

Four  push-car  venders,  each  with  a  bushel  of  potatoes, 
arrive  at  the  street  corner,  where  they  are  met  by  five 
anxious  housewives.  A  harangue  of  bids  and  haggling 
ensues,  but  back  of  all  the  noise  are  some  significant  facts. 
The  venders  will  not  give  the  potatoes  away;  each  has  his 


160  Introduction  to  Economics 

personal  valuation  below  which  he  will  not  sell,  and  each 
housewife  her  maximum  bid.  Will  there  be  trading  ?  No, 
if  all  of  the  valuations  of  the  venders  exceed  all  of  the 
maximum  offers  of  the  would-be  buyers.  And  yes,  if  the 
maximum  bid  of  any  buyer  exceeds  the  lower  limit  of  any 
seller.  All  the  potatoes  will  be  sold  only  when  all  of  the 
maximum  bids  will  be  greater  than  the  valuations  of  all 
sellers. 

We  may  put  the  matter  differently;  there  are  four  bushels 
of  potatoes  and  nine  contending  parties  for  their  posses- 
sion (four  venders  and  five  housewives).  After  all  the 
bargaining  the  wind-up  of  the  matter  will  be  that  the  four 
persons  holding  the  highest  valuations  (whether  they  be 
the  venders  or  housewives)  will  own  the  potatoes. 

Let  B  indicate  buyer  and  S  seller. 

i  B's  valuation  is  $1.40  for  1  bushel.1 

1  S's 

2  S's 

2  B's 

3  S's        " 

3  B's        " 

4  B's 

5  B's 
4  S's 

According  to  this  figure,  two  bushels  are  sold  and  two 
remain  in  the  possession  of  the  venders.  They  were  the 
four  highest  valuations  which  determined  the  ownership. 
These  unrevealed  or  hidden  valuations  are  uncovered  by 
movements  in  price,  as  may  be  seen  in  a  study  of  the  elas- 
ticity of  market  demand. 

1  When  the  valuation  of  a  good  is  expressed  by  a  sum  of  money,  it  must 
be  understood  that  the  good  in  question  is,  in  reality,  held  in  comparison 
with  any  alternative  good  which  that  sum  of  money  would  buy. 


1.40 

tor  1 

i-35 

it 

1.30 

a 

1.25 

u 

1.20 

a 

115 

a 

1. 10 

it 

1.05 

tt 

1. 00 

a 

Value  and  Demand  101 

14.  Elasticity  of  Market  Demand. — It  is  the  experience 
of  merchants  that  when  the  prices  of  certain  commodities 
are  lowered,  even  slightly,  there  is  a  marked  increase  in 
the  number  of  sales,  and  that  when  the  prices  of  these 
commodities  go  up  there  is  a  marked  decrease  in  the  mar- 
ket demand.  In  the  case  of  other  goods,  salt  for  example, 
the  number  of  sales  or  the  amount  sold  is  little  affected  by 
a  movement  in  price.  If  one  has  a  monopoly  of  salt, 
knowing  full  well  that  he  will  sell  approximately  as  much 
at  a  high  as  at  a  low  price,  would  his  asking  price  be  high 
or  low?  We  can  answer  with  certainty  that  it  would  be 
high. 

Should  this  monopolist  control  the  supply  of  a  good  for 
which  there  were  adequate  substitutes,  should  he  control 
the  supply  of  brick  in  the  neighborhood  of  a  stone-quarry, 
the  case  would  be  different.  If  his  price  were  exorbitant, 
builders  would  buy  stone.  The  elasticity  of  market  de- 
mand refers  to  the  extent  to  which  the  number  of  pur- 
chases varies  with  movements  in  price.  Salt  is  an  excellent 
example  of  a  good  for  which  there  is  an  inelastic  market 
demand;  goods  for  which  there  are  adequate  substitutes 
(cotton  for  woollen,  linen  for  silk,  wood  for  cement,  horses 
for  mules  or  motor-trucks  for  either,  one  breakfast  food 
for  another,  tea  for  coffee,  etc.)  are  examples  for  which 
there  are  elastic  market  demands. 

The  market  demand  for  tobacco  or  for  other  goods  the 
use  of  which  constitutes  a  habit  is  comparatively  inelastic. 
The  market  demands  of  the  wealthy  are  more  inelastic 
than  are  those  of  the  poor.  When  eggs  sell  at  60  cents 
a  dozen  the  wealthy  will  diminish  their  volume  of  purchases 
but  little,  whereas  the  housewife  of  meagre  circumstances 
will  economize,  substitute  A-go-la,  or  go  without  eggs. 


16£  Introduction  to  Economics 

Production  is  constantly  growing  more  varied,  and  this 
signifies  a  greater  variety  of  goods  or  means  of  substitu- 
tion. Because  of  substitutes  the  prices  of  different  goods 
move  sympathetically.  The  price  of  any  good  for  which 
there  is  an  adequate  substitute  cannot  go  disproportion- 
ately high.  A  consequence  of  varied  production  is  that 
market  demands  are  more  elastic  and  monopolies  have  less 
power  to  fix  high  prices.  Substitutes  compete  with  one 
another,  thus  lowering  the  price  and  making  it  uniform. 

Again,  the  larger  the  number  of  buyers  at  different  price 
levels,  the  greater  is  the  elasticity  of  market  demand. 
Assume  two  cases: 

First,      for  X  at  10  cents  there  would  be  one  buyer. 


"  X  "     9      " 

n 

tt 

"  two  buyers. 

"  X  "     8      " 

it 

u 

"  three  buyers. 

,    "  Y  "   10      " 

a 

ti 

"  five  buyers. 

"  Y  "    9      " 

a 

(i 

"  fifteen  buyers. 

"  Y  "    8      " 

u 

a 

"  thirty  buyers. 

It  is  obvious  that  if  the  price  drops  a  penny  on  these 
two  goods,  X  and  Y,  the  number  of  sales,  or  market  de- 
mand, of  Y  will  be  larger  than  in  case  of  X,  i.  e.,  the  elas- 
ticity of  market  demand  is  greater  for  Y  than  for  X. 

15.  Complementary  goods  are  those  which  work  to- 
gether in  serving  the  same  purpose.  The  following  are 
examples:  boilers  and  engines,  sand  and  cement,  the  right 
and  the  left  shoe,  pen  and  ink,  fiddle  and  bow,  tobacco 
and  pipe,  horse  and  carriage.  Do  not  confuse  substitutes 
with  complementary  goods,  for  they  obey  different  princi- 
ples :  goods  in  the  one  class  correspond  in  price  and  goods 
in  the  other  class  correspond  in  quantity,  as  we  shall  now 
see.  Cornflakes  and  oatmeal  are  substitutes,  consequently 
their  prices  correspond. 


Value  and  Demand  163 

Complementary  goods,  on  the  contrary,  do  not  corre- 
spond in  relation  to  price;  they  tend  to  maintain  a  con- 
stant ratio  in  relation  to  quantity.  If  one  loses  a  left  glove 
of  a  two-dollar  pair  of  gloves,  he  would  give  the  worth  of 
the  pair  to  get  it  back.  Should  we  assume  that  there  is  a 
monopoly  on  automobile-wheels,  and  that  the  owner  of  a 
$2,000  car  has  a  wheel  smashed,  it  is  evident  that  the 
owner  of  the  car  could  be  made  to  pay  almost  if  not  the 
whole  price  of  the  car  for  a  wheel.  Well-matched  horses 
are  worth  more  in  a  pair  than  separately,  just  as  a  matched 
string  of  pearls  is  far  more  valuable  than  would  be  the 
same  pearls  singly. 

In  the  construction  of  a  house  there  are  many  comple- 
mentary goods,  such  as  nails,  cement,  brick,  lumber,  hard- 
ware, and  the  like.  A  demand  for  a  house  is  a  joint  de- 
mand for  all  the  complementary  goods  entering  into  its 
construction.  If  it  is  a  favorable  time  to  build,  if  building 
materials  and  labor  are  cheap,  it  is  evident  that  nails 
(being  absolutely  essential  and  but  a  small  fraction  of  the 
total  expense  of  building)  must  reach  an  extraordinary 
price  in  order  to  discourage  building.  It  is  not  the  prices 
but  the  quantities  of  complementary  goods  which  tend  to 
maintain  a  constant  ratio  to  one  another.  Substitutes 
compete  with  one  another;  complementary  goods  employ 
one  another. 

16.  Prospective  Prices  and  Present  Demand. — -The  de- 
mands  of  the  people  are  primarily  for  consumable  goods. 
But  the  demand  for  these  places  a  demand  upon  labor 
and  the  industries  producing  consumable  goods.  In  fact, 
a  demand  for  the  products  of  labor  is  an  indirect  demand 
for  labor  and  for  other  productive  agencies.  It  frequently 
occurs,  as  in  December,  1916,  or  in  the  spring  of  that  year, 


164  Introduction  to  Economics 

that  the  pressure  for  finished  goods  becomes  intense,  with 
the  consequence  that  production  is  crowded  to  the  limit. 
Such  periods,  when  there  is  not  enough  to  go  around, 
produce  apprehension  that  supplies  will  be  so  limited  as 
not  to  be  had  at  a  reasonable  figure,  and  that  still  higher 
prices  will  prevail  in  the  future.  Buyers  rush  into  the 
market,  hoping  to  lay  in  a  stock  of  goods  before  prices  go 
up.  The  result  is,  of  course,  that  market  demand  is  quick- 
ened, thus  causing  prices  to  advance  rapidly  and  out  of 
proportion  to  a  normal  time. 

At  such  times  the  newspapers  are  filled  with  resolutions 
of  denunciations  and  urgent  requests  for  investigations. 
Somebody  must  be  blamed;  storage-houses  are  denounced, 
middlemen  condemned,  coal  operators  and  railroad  offi- 
cials are  threatened  with  public  ownership.  Everything  is 
censured,  excepting  the  right  thing — an  excess  of  demand 
at  the  old  price.  In  time  the  true  remedy  is  accomplished 
through  the  great  body  of  consumers  themselves.  If  a 
drought  shortens  a  crop,  or  grubworms  take  the  corn,  or 
boll-weevils  ruin  the  cotton,  they  may  vote  one  adminis- 
tration out  and  another  in,  yet  despite  this  unwitting  con- 
fidence in  an  administration  they  come  in  time  to  find  the 
cure.  They  begin  a  substitution  of  cheaper  products  for 
dearer;  they  are  actuated  by  an  added  stimulus  to  produc- 
tion and  enlarge  the  acreage  sown  to  wheat,  oats,  barley, 
and  planted  to  potatoes,  corn,  and  cotton.  They  produce 
more  cars,  spray  the  orchards  better,  and  in  many  other 
ways  augment  production.  This  increased  production 
allays  the  apprehension,  brings  about  a  new  and  less  pres- 
ent demand,  and  thus  lowers  the  price. 

17.  Demand  Curve. — A  demand  curve  is  a  graphic  rep- 
resentation of  the  individual  demands;  it  reports  the  num- 


Value  and  Demand 


165 


Successive  buyers  and  units  of  tea 
Figure  2 


ber  of  units  of  a  supply  that  would  be  bought  at  different 
prices.  Note  the  different  circumstances  of  the  individual 
demanders  for  some  common  necessity,  tea,  for  example. 
Some  buyers  are  of  the  "cheap  rich"  type  given  to  extrava- 
gant expenditures;  others  who  are  wealthy  calculate  their 
expenditures  with  dis- 
crimination; some  are 
spendthrifts;  others 
have  the  temperament 
to  save;  still  others  are 
poor  and  can  spend  but 
little;  some  are  in  the 
habit  of  using  tea,  while 
others  care  little  for  it. 
Thus  there  are  many 
conditions  causing  as 
many  subjective  valua- 
tions. The  marginal  desirability  of  the  dollar  (i.  e.,  alter- 
native goods  which  the  dollar  would  buy)  differs  among 
the  several  buyers,  as  does  that  of  a  unit  of  tea. 

According  to  Figure  2,  A  would  be  a  marginal  buyer  at 
60  cents,  i.  e.,  he  would  go  without  tea  rather  than  pay 
more.  At  a  lower  price  it  is  probable  that  he  would  buy 
a  larger  quantity.  Assume  that  the  market  price  is,  as  a 
rule,  about  55  cents,  what  would  be  the  effect  on  the  num- 
ber of  sales  should  the  price  drop  to  35  cents?  It  is  cer- 
tain that  the  market  demand  (the  demand  would  not  be 
affected)  would  be  increased  in  two  ways:  (a)  There  would 
be  a  larger  number  of  buyers,  and  (b)  each  buyer  on  the 
average  would  take  more  tea.  There  would  be  more  buy- 
ers: first,  because  buyer  F  would  come  into  the  market, 
and,  of  course,  since  the  buyers  A,  B,  C,  D,  and  E  are  will- 


166  Introduction  to  Economics 

ing  to  pay  more  than  35  cents  they  would  welcome  the 
opportunity  to  buy  at  that  price;  second,  the  users  of 
coffee,  cocoa,  and  the  like  would  take  to  the  use  of  tea  in 
many  cases.  The  lowering  of  the  price,  furthermore,  would 
form  an  inducement  for  each  consumer  to  buy  tea  in  larger 
amounts.  This  reasoning  is  based  upon  the  supposition 
that  the  marginal  desirabilities  of  the  buyers  with  respect 
to  both  the  alternative  use  for  money  and  the  tea  remain 
unchanged.  Such  a  supposition  is  fairly  accurate  for  short 
periods  of  time. 

18.  Demand:  Questions  and  Answers. — Some  of  the 
more  important  questions  suggested  by  the  previous  dis- 
cussion will  now  be  stated  and  answered. 

(a)  Can  one  logically  ascribe  marginal  desirability  to 
money  ? 

I  answer  in  the  negative.  Money  is  but  a  half-way 
house  in  a  trade.  If  I  give  you  my  cap  for  your  pen  the 
transaction  is  complete,  but  if  I  trade  the  cap  for  a  dollar 
and  hand  it  over  for  the  pen,  it  is  obvious  that  the  trans- 
action is  only  half  complete  when  it  reaches  the  half-way 
house — the  dollar.  Money  is  only  a  medium  of  trade, 
only  a  means  or  agency  in  the  exchange  of  the  cap  for  the 
pen.  Perchance  one  expends  his  money  for  a  ride  on  the 
train.  Why  this?  Why  did  he  not  buy  a  ticket  to  the 
ball-game,  or  buy  a  painting,  or  some  other  good?  Be- 
cause in  weighing  the  marginal  desirabilities  of  the  differ- 
ent things  his  money  would  buy  he  attached  greatest  im- 
portance to  the  ride.  As  the  check  for  your  coat  enables 
you  to  take  the  coat  from  the  cloak-room,  so  your  money 
enables  you  to  take  whatever  good  you  prefer  from  the 
market.  The  check  and  the  money  have  no  marginal  de- 
sirability in  themselves;  they  merely  reflect  the  marginal 


Value  and  Demand  167 

desirability  in  something  else.  To  define  money  as  a 
"medium  of  exchange"  is  to  foreclose  the  ascribing  of  mar- 
ginal desirability  to  it. 

(b)  How  may  the  demand  for  a  good  be  increased  ? 

There  are  two,  and  only  two,  ways  in  which  the  demand 
for  a  good  may  be  increased.  These  are:  first,  when  there 
is  the  same  number  of  demanders  as  formerly,  but  each 
is  willing  to  pay  a  higher  price,  i.  e.,  when  no  more  goods 
would  be  bought,  although  the  different  bidders  would  be 
willing  to  offer  a  higher  price  for  them;  second,  when  there 
are  more  bidders  than  formerly  at  the  different  offers,  i.  e., 
more  goods  would  be  bought  than  formerly  at  the  different 
price  levels. 

The  first:  Assume  five  bidders  for  a  certain  kind  of  auto- 
mobile who  would  be  willing  to  pay : 

Bidder  i  would  not  pay  over  $1,000  for  one  automobile. 

u        2  u         «         «         "  goo     «        « 

"      3        "       "       "       "  6oo    "      " 

"      4        "       "       "       "  400    "      " 

These  figures  represent  the  maximum  which  each  of  the 
several  bidders  would  pay.  Each  one  would  welcome  any 
less  price  than  this  maximum.  At  $1,000  there  could  be 
only  one  purchase,  for  no  other  bidder  would  give  so  much 
for  a  machine;  at  $800  there  would  be  two  purchases,  at 
$600  three  purchases,  at  $400  four  purchases  and  at  $200 
there  would  be  five  purchases.  The  following  curve  (Fig- 
ure 3)  shows  the  number  of  machines  that  would  be  taken 
at  the  different  prices. 

Assume  now  that  the  sellers  undergo  an  expensive  ad- 
vertising campaign,  that  they  cover  the  market  with  skil- 
ful salesmen,  and  provide  excellent  service  for  customers. 


168 


Introduction  to  Economics 


The  advertising,  the  work  of  salesmen  and  demonstrators, 
the  exhibits,  etc.,  educate  the  buyers  relative  to  the  quali- 
ties of  the  machine  and  to  the  new  uses  which  it  may 
serve.  Through  this  extension  of  good-will  for  the  auto- 
mobile, the  buyers  come  to  impute  a  higher  value  to  it, 
and  are  willing  forthwith  to  pay  a  higher  price.     Suppose 


$1000 

800 

'£  600 

ft 

400 
200 


%l-200 
1000 

800 

a 
G 

r  600 

400 

200 

0 

A 

y  curve 
<ied  next 
:r. 

4 

&/ 

>upp 
xpla 
hapt 

'«. 

c 

\ 

$ 

&/ 

\s 

k1 

k/c 

hi 

V5 

'/ 

4 

5 

f> 

Nui 

i     : 

Tiber 

of  l 

i     -1 

into 

mob 

iles 

12        3       4       5 

Number  of  automobiles 

Figure  3 


Figure  4 


that  each  bidder  places  an  additional  valuation  represented 
by  $200  upon  a  car.  This  means  a  new  and  higher  de- 
mand for  the  car;  there  are  no  more  sales,  but  the  price 
offers  are  higher.  This  situation  may  be  represented  by 
Figure  4. 

The  second  way  in  which  demand  is  increased:  Assume 
that  the  effect  of  the  advertising  campaign  will  be  not  to 
cause  higher  offers,  but  to  cause  four  times  as  many  bid- 
ders at  the  several  figures  above  given. 

Instead  of  one  there  are  four  whose  valuation  would  be  $1,000. 


K 

<( 

a 

«( 

a 

it 

a 

a 

C< 

a 

tt 

It 

<< 

<< 

<< 

u 

It 

it 

a 

a 

800. 

«< 

(t 

600. 

a 
tt 

<< 
it 

400. 
20O. 

Value  and  Demand 


1G9 


This  means  an  increase  in  demand  by  an  increase  in  the 
number  of  demanders  at  the  different  price  levels.  The 
following  figure  (Number  5)  shows  both  the  old  and  the 
new  or  increased  demand. 


$1200 
1000 

800 

u 

u 

r  600 

K 

400 
200 


?N 

<$&** 

% 

\s 

any- 

^6 

Sl^Jfc 

■? 

■Vv 

X? 

\s 

■*>, 

% 

6    6    7    8    9   10   11 

Number  of  automobiles 


12       13       11      16      18 


Fjgure  s 

Again,  a  demand  may  increase  in  both  ways  because  of 
an  increase  in  the  wealth  or  average  purchasing  power  in 
the  community.  Farmers,  for  example,  are  always  more 
liberal  in  their  expenditures  just  after  a  remunerative  crop 
season.  Enlarged  purchasing  power  increases  one's  de- 
mands both  in  size  and  variety. 

(c)  Assume  that  no  change  has  been  made  in  the  valua- 
tions of  bidders,  would  the  demand  for  automobiles  be  in- 
creased should  the  price  be  dropped  from  $600  to  $200? 

We  may  say  that  the  number  of  purchases  would  in- 
crease from  three  to  five,  but  there  being  no  change  in  the 
valuations  of  purchasers,  the  demand  could  not  be  in- 
creased. For  should  the  price  be  again  fixed  at  $600  the 
sales  would  be  as  before — only  three.  It  would  be  correct 
to  say  that  a  fall  in  price  increases  the  market  demand,  for 
it  always  expresses  the  number  of  purchases  at  the  market 
price.  Demand  must  not  be  confused  with  market  de- 
mand: the  former  refers  to  the  quantity  of  a  good  that 


170  Introduction  to  Economics 

would  be  bought  at  a  series  of  different  prices;  the  latter 
refers  to  the  quantity  of  a  good  that  would  be  bought  at 
the  market  price. 

19.  Recapitulation. — We  have  seen  that  desirability  is 
individualistic :  There  is  no  such  thing  as  social  desirability. 
Demand  arises  out  of  the  comparisons  of  marginal  desira- 
bilities. If  one  has,  say,  a  dollar,  and  there  are  three 
goods,  A,  B,  and  C,  any  one  of  which  sells  for  a  dollar,  he 
makes  comparison  of  the  marginal  desirabilities  of  the 
different  things  the  dollar  will  buy.  He  will  retain  the 
dollar  if  the  marginal  desirability  of  some  alternative  use 
outweighs  that  of  each  of  the  three  goods  mentioned,  or 
he  will  spend  it  in  case  the  marginal  desirability  of  any 
good  outweighs  that  of  the  alternative  use  for  the  dollar, 
for  as  the  marginal  desirability  of  a  good  is  high  one 
attaches  high  value  to  it.  The  explanation  of  the  demand 
and  the  forces  back  of  it  are  found  only  in  the  analysis  of 
marginal  desirability.  Somewhat  elliptically  speaking,  the 
order  of  thought  is:  desire  as  a  motive  of  acquiring  the 
means  of  gratification  *»-»-  scarcity  of  the  means  of  gratifica- 
tion *»-*-  desirability  of  these  means  ■»->  relative  marginal 
desirabilities  *►->  value  »-►  valuation  »-*-  demand. 

20.  Exercises. — 1.  Define  price.  Does  the  process  of 
reasoning  that  would  lead  to  the  exchange  of  a  cow  for  a 
horse  differ  from  that  which  would  result  in  the  exchange 
of  $100  for  a  horse  ? 

2.  Define  value.  Why  has  the  term  "intrinsic  value" 
come  into  disrepute?  Is  the  value  which  one  attributes 
to  a  good  varied  because  of  the  following:  Change  in  fash- 
ion?    New  discovery?     Increased  amount? 

3.  What  is  meant  by  the  paradox  of  value  ?  What  bear- 
ing does  it  have  upon  the  fact  that  the  self-interest  of  a 
.nonopolist  may  be  contrary  to  the  welfare  of  society? 


Value  and  Demand  171 

4.  In  the  above  example,  why  was  A  unwilling  to  trade 
all  of  his  salt  for  rice?  What  determined  the  limit  of  his 
trading  for  rice? 

5.  The  idea  of  valuation  must  precede  that  of  demand. 
Explain  this  fact. 

6.  Distinguish  between  desire  and  demand.  To  whom 
and  to  what  does  demand  refer?  To  whom  and  to  what 
does  supply  refer  ? 

7.  Construct  a  supply  and  a  demand  curve  to  represent 
the  figures  on  page  156,  and  explain  why  the  price  could 
be  neither  above  nor  below  $1.20. 

8.  What  is  the  difference  between  amount,  supply,  mar- 
ket supply?     Between  demand  and  market  demand? 

9.  What  is  meant  by  the  elasticity  of  market  demand? 
With  respect  to  what  kind  of  goods  is  this  elasticity  most 
pronounced?  Is  this  elasticity  different  as  between  the 
poor  and  the  rich?  How  does  the  number  of  potential 
buyers  at  different  price  levels  have  a  bearing  upon  the 
elasticity  of  the  market  demand  ? 

10.  Is  the  elasticity  of  market  demand  for  substitutes 
governed  by  the  same  principle  as  that  which  operates  in 
case  of  complementary  goods?     Explain  why  or  why  not. 

11.  The  Dutch  East  India  Company  used  to  destroy 
part  of  the  spice-crop  in  order  to  enhance  its  profits.  Was 
there  a  fallacy  in  the  proceedings?     (Sumner.) 

12.  Criticise  the  following: 

(a)  "The  marginal  desirability  of  money  varies  as  people 
have  more  of  it."  Does  marginal  desirability  refer  to  a 
unit  or  to  the  whole  amount  of  a  good?  to  all  persons  or 
to  an  individual  ?  does  it  refer  to  money  at  all  ? 

(b)  "The  demand  will  be  larger  when  prices  are  low,  and 
vice  versa.'"  Do  you  agree  with  this?  If  not,  reword  the 
sentence  to  agree  with  your  thought. 

(c)  "A  low  price  causes  a  large  demand,  but  a  small 
supply."  If  this  is  true,  would  it  also  be  true  that  "sup- 
ply and  demand  are  always  equal  to  each  other"?  Does 
price  determine  supply  and  demand>  or  is  just  the  opposite 
true? 


CHAPTER   IX 
SUPPLY 

i.  Supplies;  their  variety,  adjustment,  and  limitations.  2.  Purchasing 
power  and  supply.  3.  Fixed  supplies.  4.  Senior's  statement.  5.  Cost 
defined.  6.  Cost  and  limitation  of  factors.  7.  Cost  and  the  price  of 
product.  8.  Cost  a  price  expression  of  limitation  of  agents.  9.  Supplies 
limit  each  other.  10.  Competition  of  supplies.  11.  Increasing  cost.  12. 
Opportunity  cost.  13.  Kinds  of  opportunity  cost.  14.  Past  cost  and  pres- 
ent supply:  present  cost  and  future  supply.  15.  Selling  below  cost.  16. 
Joint-cost.  17.  Movements  in  market  supply.  18.  Movements  in  supply 
curve.     19.  Recapitulation.     20.  Exercises. 

i.  Supplies;  Their  Variety,  Adjustment,  and  Limita- 
tions.— He  who  visits  a  great  city  for  the  first  time  beholds 
a  variety  of  supplies  quite  beyond  his  powers  of  compre- 
hension. He  sees  goods  of  innumerable  kinds,  shapes, 
contents,  and  sizes.  He  sees  a  supply  provided  for  the 
gratification  of  every  want,  desire,  whim,  and  fancy  that 
the  imagination  can  invent.  What  impression  must  the 
backwoodsman  carry  away  who  is  privileged  to  witness 
the  variety  of  products  within  a  large  centre  of  trade,  or 
who  beholds  the  maze  of  sample  commodities  which  at  a 
world's  fair  are  assembled  from  all  trades  and  nations  for 
exhibition?  Well  might  he  believe  that  the  golden  age 
of  which  men  have  always  dreamed  is  at  hand. 

This  variety  of  supplies  could  not  exist  apart  from  dif- 
ferences in  productive  capacity.  Coal,  gold,  iron,  silk, 
apples,  salt,  or  any  other  product,  is  the  output  of  a  par- 
ticular type  of  productive  power.     As  with  natural  re- 

172 


Supply  173 

sources  and  artificial  agents,  so  with  labor — it  exists  in 
great  variety. 

Mining  is  hard  work,  so  why  should  any  dig  coal  when 
there  are  such  agreeable  occupations  as  that  of  pitching  a 
few  games  of  baseball  each  summer  at  a  salary  of  $10,000? 
Why  do  the  majority  of  laborers  go  into  the  positions  that 
pay  low  wages,  while  so  few  enter  the  more  remunerative 
employments?  The  laborer's  choice  is  limited  by  his 
aptitude  for  the  tasks.  According  to  their  different  ca- 
pacities, producers  are  divided  into  many  classes,  and  are 
adjusted  accordingly  to  the  unlike  tasks  within  the  divi- 
sion of  labor. 

But  the  variety  of  supplies  is  not  alone  due  to  different 
forms  of  productive  capacity,  for  differences  among  de- 
mands furnish  the  motives  for  the  production  of  all  sup- 
plies. Should  all  turn  vegetarian,  those  who  grow  swine 
would  have  to  find  another  occupation.  Should  none  want 
pork,  no  one  would  demand  it,  and  so  none  would  be  pro- 
duced.    In  every  case  there  is  a  demand  back  of  supply. 

Supply  Adjustments:  Not  only  do  supplies  exist  in  great 
variety,  but  also  they  tend  to  hold,  to  the  degree  of  a 
mathematical  nicety,  a  proper  economic  apportionment  to 
one  another  at  innumerable  different  prices.  Strangely 
enough,  there  are  many  persons  (none  of  them  economists) 
who  would  have  the  government  take  charge  of  produc- 
tion and  manage  it.  They  would  have  it  dictated  that 
so  much  of  this,  that,  and  the  other  shall  be  produced. 
Fortunately  this  industrial  imperialism  is  uncalled  for, 
because,  in  obedience  to  natural  economic  laws,  there  is  a 
tendency  for  the  various  supplies  to  maintain  a  perfect 
economic  adjustment.  There  is  no  boss  and  no  need  for 
any  to  dictate  this  adjustment;  it  is  the  outgrowth  of 


174  Introduction  to  Economics 

natural  forces  which,  under  free  competition,  operate 
through  the  agency  of  market  price. 

Why  are  there  not  innumerable  mistakes  in  the  relative 
outputs  of  the  different  lines  of  supply?  Why  do  we  not 
have  twice  or  three  times  as  much  productive  power  turned 
to  the  growing  of  wheat,  and  but  a  half  or  third  as  much 
given  to  the  manufacture  of  shoes?  Why  is  the  total 
productive  capacity  apportioned  as  it  is  among  different 
fields  of  endeavor,  why  not  some  other  apportionment? 

Were  there  a  relative  overabundance  of  wheat,  its  cost 
of  production  would  exceed  its  market  price,  and  many 
would  abandon  its  production.  Were  there  an  insuffi- 
ciency of  shoes,  their  market  price  would  so  exceed  their 
cost  as  to  attract  many  new  producers.  As  water  seeks  a 
common  level,  so  through  market  prices  competition  tends 
toward  a  uniformity  of  profits  (selling  prices  less  costs), 
and  hence  toward  a  proper  economic  apportionment  among 
the  different  supplies. 

Supply  Limitations:  What  determines  the  limitation  to 
the  volume  of  the  different  supplies  ?  Productive  capacity 
is  limited,  i.  e.:  it  is  incapable  of  furnishing  us  all  that  we 
wish.  If  our  desires  did  not  extend  beyond  a  few  simple 
lines  of  consumption,  they  could  be  fully  satisiied.  But 
when  we  demand  a  thousand  things,  rather  than  five  or 
six,  productive  capacity  is  incapable  of  meeting  in  full  the 
numerous  drafts  made  upon  it.  Each  person  so  directs 
his  limited  energies  that  there  is  a  tendency,  but  only  a 
tendency,  to  keep  his  numerous  desires  equally  gratified. 
As  a  result  no  desire  can  be  fully  satisfied,  and  each  supply 
limits  every  other  supply.  In  our  impatience  we  complain 
of  the  "niggardliness  of  nature,"  for  it  does  not  furnish 
all  that  we  want;  we  might  equally  condemn  our  unbridled 


Supply  175 

desires,  for  they  are  such  that  we  cannot  have  all  we  want. 
These  thoughts  on  supply  will  be  more  fully  presented  in 
the  following  discussion. 

2.  Purchasing  Power  and  Supply. — Supply  and  demand 
are  closely  related  ideas.  Referring  again  to  the  example 
of  A  and  B  with  the  salt  and  rice;  A's  salt,  together  with 
his  desire  for  rice  made  a  demand,  and  B's  rice  together 
with  his  desire  for  salt  made  a  demand.  It  is  always  the 
demand  which  fosters  the  production  of  supply. 

Every  good  finds  a  sale  because  some  one  desires  it  and 
has  another  good  or  service  to  exchange  for  it.  Great  pro- 
duction means  abundant  purchasing  power  that  opens  a 
demand  for  other  products.  The  greatest  vent  for  one's 
wares  is  found  in  those  places  where  the  most  wealth  is 
produced.  A  salable  product  is  no  sooner  created  than  it, 
from  that  instant,  affords  a  market  for  other  products  to 
the  full  extent  of  its  own  price.  A  good  harvest  is  a  bless- 
ing, not  only  to  the  agriculturist,  but  likewise  to  the  dealers 
in  all  commodities.  Industries  are  so  interdependent  that 
the  success  of  one  has  a  wholesome  effect  upon  all  the 
others.  To-day  we  regard  Voltaire's  dictum  as  sheer  non- 
sense, that  "such  is  the  lot  of  humanity,  that  the  patriotic 
desire  for  one's  country's  grandeur  is  but  a  wish  for  the 
humiliation  of  one's  neighbors;  .  .  .  that  it  is  clearly  im- 
possible for  one's  country  to  gain,  except  by  the  loss  of 
another."  We  are  interested  in  the  prosperity  of  others 
because  their  success  causes  a  demand  for  our  own  goods. 

In  the  progressive  state  talent  is  turned  to  account;  in 
the  retrograde  state  it  goes  unrewarded.  Compare  the 
merchant's  opportunities  in  a  rich  town  with  those  of  the 
merchant  in  the  district  of  indolence  and  apathy.  There 
is  no  gain  from  dealing  with  a  people  that  have  nothing  to 


176  Introduction  to  Economics 

pay.  Large  purchasing  power  brings  forth  large  demands, 
and  in  response  to  demands  supplies  are  produced.  An 
exception  to  this  must  be  made  for  fixed  supplies. 

3.  Fixed  Supplies. — There  is  no  cunning  or  device  by 
which  we  may  multiply  the  paintings  of  a  dead  artist. 
Antiques,  rare  jewels,  meteoric  stones,  and  select  building 
sites  are  fixed  in  volume  of  supply.  The  present  valuation 
of  such  supplies  is  affected  in  no  way  by  their  original  cost. 
One  would  as  readily  pay  $100  for  the  autograph  of  a 
famous  seventeenth  century  author  as  for  an  antique,  the 
production  of  which  cost  days  of  toil.  The  meteoric  stone, 
the  nugget  picked  up  by  chance  at  a  river's  bank,  stand  in 
one's  valuation  upon  precisely  the  same  basis  as  does  the 
old  sculptor's  product  costing  months  of  sacrifice  and  labor. 
It  is  not  the  labor  or  expense  of  their  original  production, 
but  it  is  the  relative  marginal  desirability  of  such  goods 
that  determines  one's  price  appraisal  (valuation)  of  them. 

4.  Senior's  Statement. — It  is  not  to  be  implied,  how- 
ever, that  cost  has  no  bearing  upon  the  valuation  of  a 
good,  for  most  emphatically  it  does  have  such  a  bearing 
in  the  case  of  most  goods.  I  shall  say  in  the  case  of  all 
reproducible  goods  on  the  market.  Whatever  influence, 
cost  or  other,  that  limits  supply  must  affect  the  valuation 
and  ultimately  the  price  of  a  commodity.  Bear  it  in  mind 
that  one's  valuation  and  consequent  demand  for  a  good 
are  derived  from  its  marginal  desirability  in  comparison 
with  the  marginal  desirability  of  that  which  he  would  pay 
in  exchange.  But  the  relative  marginal  desirability  of  a 
good  is  high  or  low,  as  the  supply  is  small  or  large.  So  we 
say  that  unfavorable  labor  conditions,  ill-adapted  ma- 
chinery, a  poor  crop  year,  a  shortage  of  cars,  a  panic,  a 
heavy  cost  of  production,  or  a  limitation  in  the  necessary 


Supply  177 

agencies  of  production — any  form  of  influence  which  short- 
ens a  supply  does  increase  its  marginal  desirability  and  in 
consequence  increases  the  price. 

Professor  Davenport  makes  this  most  illuminating  quo- 
tation1 from  the  writings  of  N.  W.  Senior:  "Any  other  cause 
limiting  supply  is  just  as  efficient  a  cause  of  value  in  an 
article  as  the  necessity  of  labor  in  its  production.  And,  in 
fact,  if  all  the  commodities  used  by  man  were  supplied  by 
nature  without  any  intervention  whatever  of  human  labor, 
but  were  supplied  in  precisely  the  same  quantities  that 
they  now  are,  there  is  no  reason  to  suppose  either  that 
they  would  cease  to  be  valuable,  or  would  exchange  in  any 
other  than  the  present  proportions." 

Cost,  then,  bears  on  the  price  of  a  good  only  as  it  influ- 
ences the  supply,  but  so  important  and  far-reaching  is  the 
influence  of  cost  upon  supplies  that  we  must  not  spare  a 
thorough  analysis  of  it. 

5.  Cost  Defined. — Cost  is  the  antithesis  of  income;  it  is 
outgo — the  outgo  made  to  get  an  income.  If  I  enjoy  the 
income  of  a  man's  labor,  it  is  at  the  cost  of  paying  him  a 
wage;  if  I  enjoy  the  income  of  your  house  it  is  at  the  cost 
of  paying  you  a  rent;  if  I  enjoy  the  income  of  a  farm  it  is 
at  the  cost  of  paying  for  the  uses  of  that  farm. 

Should  I  own  the  farm,  the  house,  and  do  my  own  work, 
I  would  pay  neither  a  rent  nor  a  wage  to  another.  Can  it 
be  said  that  I  enjoy  income  free  from  cost?  The  cost  of 
my  income  is  not  less  real  because  I  own  the  agencies  of 
its  production.  I  could  have  let  the  house  and  farm  for  a 
rent,  also  I  could  have  received  a  wage  by  working  for 
some  one  else.  If  this  farm  and  house  could  be  let  to 
another  for  $1,500,  I  simply  give  up  the  receipt  of  $1,500, 

1  "  Value  and  Distribution,"  p.  44. 


173  Introduction  to  Economics 

by  retaining  them  for  my  own  use.     And  so  with  the  wage 
relinquished;  it  is  a  cost. 

The  ideas  of  cost  and  sacrifice  are  closely  related.  We 
hear  it  remarked:  his  victory  cost  him  his  life;  that  paint- 
ing cost  tireless  effort;  he  drained  the  swamp  at  the  cost 
of  his  health.  Strict  accuracy  would  require  the  use  of 
the  word  sacrifice  rather  than  cost  in  these  remarks. 

Cost  is  an  outgo  and  is  expressed  in  terms  of  money. 
It  may  be  regarded  either  as  a  sum  paid  to  another  or  as 
income  foregone.  It  is  a  mere  word  quibble,  worthy  of 
no  serious  attention,  not  to  use  the  word  outgo  in  the  case 
of  a  relinquished  income.  I  no  longer  have  it  if  I  pay  out 
$1,500,  nor  do  I  have  that  sum  if  I  refrain  from  accepting  it. 

The  cost  or  price  outgo  necessary  to  get  twenty  bushels 
of  potatoes  may  be  divided  into  several  parts.  You  may 
rent  some  land,  hire  some  tools,  hire  a  horse,  hire  a  laborer, 
and  buy  some  seed.  With  these  the  twenty  bushels  of 
potatoes  are  produced.  The  aggregate  of  all  these  prices 
is  the  cost.  In  case  you  own  these  different  agents  of  pro- 
duction and  do  your  own  work,  you  are  out  of  pocket,  i.  e., 
your  cost  is  the  aggregate  of  all  the  prices  you  might  have 
received  by  letting  them  to  other  people.  Or  suppose  you 
could  sell  these  for  $1,000.  It  costs  you,  if  the  rate  is  5 
per  cent,  the  interest  on  this  sum  or  $50  to  hold  it  for  your 
own  use. 

6.  Cost  and  Limitation  of  Factors. — There  is  much  dif- 
ference between  the  cost  which  one  must  undergo  if  he 
get  a  good,  and  the  cost  which  he  is  willing  to  undergo  in 
order  to  get  it.  What  determines  the  cost  which  the  busi- 
ness man  must  pay  to  produce  a  good?  As  a  bushel  of 
corn  is  the  product  of  land,  seed,  labor,  and  tools,  so  any 
other  product  is   the   output   of  a  number  of  agencies. 


Supply  179 

Should  the  productive  capacity  of  these  several  agencies 
exist  in  such  abundance  as  does  air  or  sunshine,  their  ser- 
vices would  be  free  and  could  command  no  price.  But  un- 
fortunately the  productive  agents  are  limited,  some  of 
them  very  narrowly  limited,  and  so  their  services  are 
scarce  and  command  prices.  Demand  fixed,  the  cost  which 
the  business  man  must  undergo  to  produce  a  good  depends 
upon  the  limitation  of  the  productive  factors  back  of  that 
good.  If  there  be  a  large  demand  for  the  product  of  a 
narrowly  limited  factor,  the  cost  outlay  for  the  services  of 
that  factor  must  be  high.  If  there  be  a  small  demand  for 
the  product  of  a  factor,  the  cost  outlay  for  the  services  of 
that  factor  will  be  low.  Demand  remaining  the  same,  the 
cost  or  price  paid  for  the  services  of  an  agent  varies  with 
variations  in  the  supply  of  the  agent.  Let  us  now  turn 
to  an  answer  of  this  question;  what  determines  the  cost 
which  the  business  man  is  willing  to  undergo  to  produce  a 
good? 

7.  Cost  and  the  Price  of  Product. — The  amount  of  costs 
which  the  business  man  is  willing  to  undergo  is  determined 
by  the  price  which  he  expects  the  product  to  bring.  One 
will  not  pay  a  cost  of  $3  to  produce  a  bushel  of  corn  which 
he  would  expect  to  sell  for  $2.  One  makes  the  outlay  to 
grow  corn  on  the  poor  hillside,  or  to  construct  a  shaft  far 
into  the  ground  for  a  ton  of  coal,  or  he  pays  a  wage  suffi- 
ciently high  to  induce  the  laborer  to  risk  his  life  in  dan- 
gerous enterprises,  because  the  price  of  his  product  will  be 
high  enough  to  justify  the  cost.  Pearls  are  not  high-priced 
because  men  dive  for  them,  but  men  dive  for  them  because 
they  are  high-priced.  Cost  does  not  determine  the  price 
of  commodities,  but  the  price  of  commodities  determines 
the  cost  one  will  undergo  to  get  them.     The  cost  of  pro- 


180  Introduction  to  Economics 

during  any  good  is  the  total  price  of  everything  entering 
into  its  production,  and  the  reason  for  paying  these  prices 
is  that  the  good  will  sell  for  a  price  higher  than  its  cost. 

8.  Cost  a  Price  Expression  of  Limitation  of  Agents. — 
Productive  factors  are  priced  in  keeping  with  the  price  of 
their  anticipated  yields.  A  security  will  bring  a  high  price 
if  it  promises  to  pay  a  high  return.  Land,  mines,  steam- 
ships, and  other  productive  agents  are  high-priced  or  low 
as  their  anticipated  incomes  are  large  or  small.  With  certain 
omissions,  the  order  of  thought  may  be  indicated  as  follows: 
Demand  fixed;  any  productive  agent,  say  land  »»->  amount 
of  yield  or  product  »-*•  price  of  yield  or  product  >»->  price 
of  land.  This  schematic  showing  of  the  causal  sequence 
makes  it  obvious  that  it  is  the  scarcity  of  the  agent  (demand 
taken  for  granted)  which  explains  the  limited  supply  of  the 
product.  They  are  the  limitations  of  agents  relative  to  the 
drafts  made  upon  them  which  cause  the  costs  that  must  be 
made  by  an  entrepreneur  to  produce  a  good.  If  factors  A 
and  B  are  essential  to  the  production  of  a  commodity,  and 
if  A  may  be  had  in  great  abundance  while  B  is  scarce,  evi- 
dently the  business  man  will  have  to  pay  high  for  the  use 
of  B  and  little  for  the  use  of  A.  Cost  becomes  simply  the 
price  expression  of  the  scarcity  and  productivity  of  agents. 

9.  Supplies  Limit  Each  Other. — Because  of  limited  pro- 
ductive capacity  there  is  a  limit  to  the  total  supply  of  all 
goods.  But  in  the  market  there  are  various  demands  call- 
ing for  the  production  of  a  variety  of  goods.  The  relative 
strength  of  the  different  demands  causes  a  larger  cost  out- 
lay in  the  production  of  some  goods  than  of  others.  If  the 
market  price  for  corn  is  considerably  higher  than  for  wheat, 
farmers  will  use  more  land  for  corn  and  less  for  wheat. 
An  increase  of  the  one  may  mean  a  decrease  of  the  other. 


Supply 


181 


If  demands  so  multiply  that  ten  classes  of  commodities 
must  be  supplied  whereas  formerly  five  were  supplied, 
other  things  remaining  equal,  the  supply  of  each  class  of 
commodities  must  be  less  than  formerly. 

In  Figure  i,  let  the  total  length  of  the  five  lines  a  a'  to  e  c' 
be  equal  to  the  total  length  of  the  ten  lines  //'  to  o  o' .   Now, 


A 

a 

b 

C 

d 

B 

r 

g 

h 

i 

i 

/, 

! 

rr 

1 

n 

0 

C 

a 

i 

b 

t 

c 

t 

d 

'     t 

> 

7 

0 

t 

h 

t 

i 

f 

J 

I 

1 

1 

m' 

u 

t 

(J 

• 

D 


E 
Figure  i 


F 


if  the  length  of  one  of  these  lines  represent  the  total  vol- 
ume of  any  one  class  of  supply,  it  will  be  obvious  that, 
other  things  equal,  in  the  latter  stage  a  supply  is  but  one- 
half  as  large  as  in  a  former  stage.  When  the  production 
of  ten  units  rather  than  five  is  undertaken,  it  follows  that 
but  a  half  of  the  former  labor  and  other  productive  capac- 
ity, on  the  average,  can  be  given  to  any  one  supply. 

io.  Competition  of  Supplies. — Another  way  of  putting 
this  thought  is  to  say  that  supplies  compete  for  the  same 
productive  agents.  The  same  field  may  be  used  for  graz- 
ing, for  the  growing  of  hay,  corn,  or  for  the  most  valuable 
fruits.  Lands  for  the  growing  of  such  fruit  are  rare  and 
expensive,  and  so  the  growers  of  the  cheaper  commodities 
mentioned   could  not  compete  with  the  fruit-growers  for 


182  Introduction  to  Economics 

such  land  because  the  price  of  their  product  would  not 
justify  it.  With  the  discovery  or  improvement  of  more 
such  land,  however,  the  price  of  fruits  would  be  lowered 
and  the  growers  of  the  cheaper  commodities  may  come 
into  effective  competition  with  the  fruit-growers.  Thus  it 
is  apparent  that  the  cost  which  one  producer  must  undergo 
for  an  agent  is  influenced  by  other  competing  uses  for  the 
same  agent.  The  cost  outlay  of  the  corn-grower  is  influ- 
enced by  the  other  competing  uses  for  the  land.  The  land 
will  go  to  the  highest  competitor;  to  the  extent  that  land 
is  used  for  other  products  corn  will  be  scarce  and  high- 
priced,  but  the  more  this  corn  is  worth  the  higher  is  the 
cost  which  the  corn-grower  can  pay  in  competition  with 
others  for  the  land. 

ii.  Increasing  cost  per  unit  of  output  has  been  errone- 
ously used  by  able  thinkers,  who  ought  to  know  better,  as 
a  synonym  for  the  law  of  diminishing  returns.  This  latter 
concept  will  be  given  discussion  under  the  caption,  "  Pro- 
portionality." Increasing  cost  is  a  blanket  term  covering 
a  number  of  ideas.  We  shall  make  brief  mention  of  (a)  ex- 
haustion of  basic  wealth,  (b)  monopolization  of  a  factor,  (c) 
malapportionment  of  factors.  Although  America  is  a  new 
land,  yet,  due  to  improper  rotation  of  crops  and  to  want  of 
adequate  fertilization,  the  productivity  of  the  soil  in  many 
places  is  being  exhausted,  with  the  consequence  that,  other 
things  equal,  it  requires  a  greater  cost  to  secure  a  unit  of 
supply.  And  this  greater  cost  will  be  met  only  in  case 
demand  is  such  as  to  justify  it.  The  choicest  timber  has 
been  cut  away  in  places  and  in  other  places  exhaustion  is 
threatened,  so  it  must  result  that  supplies  are  secured  at 
an  increasing  cost.  As  coal  is  removed  train-load  after 
train-load,  year  in  and  year  out,  we  must  go  farther  and 


Supply  183 

farther  from  the  mouth  of  the  mine.  In  many  other  ways 
the  constantly  increasing  cost  of  production  is  due  to 
reduced  supplies  of  basic  wealth. 

Again,  the  business  man  finds  certain  factors  essential 
to  the  output  of  his  product.  What  if  a  monopoly  or 
other  restriction  controls  the  supply  of  a  factor  ?  He  must 
pay  the  monopoly  price  or  quit  business.  Thus  a  pro- 
ducer may  suffer  increasing  costs  through  the  artificial 
monopolization  or  restriction  of  others. 

The  malapportionment  of  factors  must  wait  its  turn  for 
fuller  treatment.  We  may  say  here  that  we  have  increas- 
ing costs  or  decreasing  costs  as  the  malapportionment  of 
factors  is  becoming  worse  or  better.  It  is  this  phase  of 
increasing  cost,  and  this  only,  which  will  find  discussion 
under  the  heading  of  diminishing  returns.  A  manufac- 
turer finds  that  he  must  work  out  an  adjustment  of  factors 
to  factors  within  his  plant  and,  furthermore,  that  the  size 
of  the  whole  plant  must  be  adjusted  to  the  extent  of  his 
market.  To  the  degree  that  he  reaches  an  ideal  adjust- 
ment his  costs  of  production  decrease,  and  vice  versa.  We 
shall  see  that,  although  a  factor  may  be  kept  in  a  perfect 
state  of  repair,  yet,  because  of  diminishing  returns,  the 
costs  per  unit  of  output  will  increase. 

12.  Opportunity  Cost.1 — If  one  goes  to  a  theatre  in  the 
evening  he  cannot  spend  that  evening  at  home  with  his 
family.  If  he  has  a  dollar  and  wants  a  cap  costing  a  dollar 
as  well  as  a  pair  of  gloves,  it  follows  that  if  he  buys  the 
gloves  he  must  forego  the  cap.  The  real  choice  determin- 
ing the  direction  of  his  effort  is  not  between  the  dollar 
and  the  gloves,  but  between  the  gloves  and  the  cap,  there- 

1  For  best  discussion  of  this  topic  see  Davenport's  Economics  of  Enter- 
prise. 


184  Introduction  to  Economics 

fore  the  gloves  cost  him  the  cap.  One  may  use  his  field  to 
grow  either  corn  or  cotton;  to  grow  cotton  costs  him  the 
opportunity  to  grow  corn.  If  one  has  a  coal-mine,  it  can 
be  used  only  for  the  output  of  coal,  yet  its  owner  must 
give  up  recreation  if  he  works  it  and  sacrifice  the  alterna- 
tive income  on  the  capital  which  he  must  put  into  the 
mine.  In  the  choice  of  an  occupation  the  young  man  has 
an  open  field.  He  hesitates  in  his  selection,  knowing  full 
well  that  his  choice  closes  the  gates  between  him  and  other 
promising  alternatives.  Getting  into  a  profession  or  occu- 
pation is  like  getting  into  the  rapids — it's  difficult  to  turn 
back.  Were  there  no  alternatives  there  could  be  no  choos- 
ing, and  a  choice  made  implies  other  opportunities  relin- 
quished. Opportunity  cost  is  truly  significant  in  the  ex- 
planation of  supply,  because  business  men  do  weigh  oppor- 
tunities against  each  other  in  deciding  to  produce  any  one 
variety  of  supply. 

13.  Kinds  of  Opportunity  Cost. — One  may  be  capacitated 
for  large  earnings  in  the  business  world  and  yet  choose  to 
devote  himself  to  research  or  to  a  learned  profession  with 
a  small  monetary  return.  Personal  pride  or  public  opinion 
may  operate  to  direct  one  from  the  field  where  the  mone- 
tary income  is  to  be  found.  In  numerous  cases  such  as 
these,  choice  is  not  dictated  solely  by  a  price  consideration; 
nevertheless,  these  choices  directly  affect  supplies. 

The  choice  between  recreation  and  the  sacrificing  of  wages 
presents  some  curious  examples.  It  is  a  rule  that  the  higher 
the  price  for  a  commodity  the  larger  will  be  the  production 
of  that  commodity.  But  a  higher  wage  per  hour  does 
not  necessarily  mean  that  laborers  will  work  longer  hours. 
High  wages,  generally  speaking,  lead  workmen  to  agitate 
for  an  eight-hour  day,  rather  than  for  a  twelve-hour  day. 

The  end-of-the-day  margin  expresses  the  fact  that  fatigue 


Supply 


185 


increases  as  one  works  longer  until  finally  a  point  is  reached 
when  the  worker  prefers  recreation  to  the  extra  income. 
If  the  worker  is  getting  40  cents  an  hour,  his  income  will 
be  considerably  larger  than  his  sacrifice  for  the  first  hours 
of  the  working-day,  but  the  margin  of  difference  will  dimin- 
ish as  the  day  advances,  until  finally  his  sacrifice  will  equal 
his  income  and  there  he  will  wish  to  end  the  day's  work. 
Each  added  40  cents  diminishes  the  desirability  of  money, 
and  each  added  hour's  labor  increases  his  sacrifice. 


0 


123456      7      89    10    11   12 

Figure  2 


As  we  have  presented  Figure  2,  the  sacrifice  curve  is 
steeper  than  the  desirability  curve.  If  the  laborer's  stand- 
ard of  living  is  low,  his  desires  will  be  easily  gratified,  con- 
sequently if  the  wages  per  hour  are  high  the  curve  AB 
would  be  much  steeper  than  CD.  If  his  standard  be  high, 
his  desires  of  a  high  order  and  varied,  CD  would  be  much 
steeper  than  AB.  In  any  case  the  end-of-the-day  margin 
will  be  reached;  this  is  a  significant  fact  in  the  limitation 
of  the  supply  of  labor,  and  consequently  of  the  supplies 
which  labor  produces. 

14.  Past  Cost  and  Present  Supply;  Present  Cost  and 
Future  Supply.— Consumption  goods  and  present  supplies 
are  not  as  a  rule  the  products  of  current  industry.     Apples 


186  Introduction  to  Economics 

are  gathered  from  trees  planted  twenty-five  years  ago. 
Trace  a  pair  of  shoes  back  to  the  leather,  the  leather  to 
hides,  the  hides  to  cattle,  the  cattle  to  land  and  its  prod- 
ucts, the  land  back  to  its  preparation,  the  preparation  to 
the  tools  and  these  on  back — the  origin  of  current  supplies 
could,  in  large  part,  be  traced  far  back.  It  is  estimated 
that  not  one-tenth  of  current  supplies  is  wholly  the  prod- 
uct of  current  industries.  Current  supplies,  then,  are  lim- 
ited by  the  estimates  which  business  men  in  the  past  have 
made  of  the  prices  which  we  should  be  willing  to  pay 
to-day. 

At  any  one  time  men  are  planting  orchards,  preparing 
land,  building  new  factories,  and  extending  old  ones  in 
anticipation  of  future  prices.  Merchants  buy  ahead, 
builders  make  future  contracts,  farmers  allot  certain 
amounts  of  land  to  cotton  and  sugar-beets,  depending  en- 
tirely upon  their  estimate  of  future  prices.  Thus,  it  is 
seen  that  current  supplies  are  largely  determined  by  the 
estimates  which  business  men  in  the  past  made  of  present 
prices,  and,  further,  that  present  estimates  of  future  prices 
are  now  shaping  industry  so  as  to  determine  future  sup- 
plies. Bearing  directly  on  the  present  volume  of  different 
supplies  is  the  fact  that  we  limit  current  supplies  by  shap- 
ing our  efforts  to  the  end  of  production  for  the  future. 
Should  wre  convert  the  labor  and  capital  now  employed  in 
the  construction  and  extension  of  factories,  railways,  and 
other  productive  agencies  into  the  making  of  consumable 
goods,  we  should  have  a  present  feast  at  the  expense  of 
future  hunger.  All  costs  are  forward-looking;  the  provi- 
sion of  supply  looks  to  the  future.  This  fact  makes  oppor- 
tunity costs  singularly  significant  in  the  supply  problem. 

It  should  be  clear  that  it  is  supply,  not  the  cost,  which 


Sujjply  187 

determines  present  price.  If  at  great  cost  a  railroad  is 
constructed  in  a  region  of  few  resources  it  will  be  of  little 
worth.  There  are  idle  factories  stocked  with  the  best 
equipment  known  to  man,  valueless  because  they  are  idle 
and  idle  because  of  the  miscalculation  of  their  builders. 

In  a  West  Virginia  oil-field  a  Mr.  Clay  sank  a  well  within 
ten  feet  of  the  boundary-line  of  his  land.  He  struck  a 
gusher  worth  several  thousands  of  dollars.  His  neighbor, 
anxious  to  tap  the  same  pocket  or  pool  of  oil,  sank  a  well 
but  six  feet  on  the  other  side  of  the  boundary-line.  His 
cost  was  $3,200,  and  that  for  a  dry  hole.  It  is  not  the 
cost  but  the  price  of  the  yield  which  determines  the  price 
of  a  productive  agent.  The  cost  of  producing  a  good  is 
the  total  of  all  the  prices  paid  for  the  services  of  the  agents 
that  produce  it.  But  how  do  these  factors — the  labor, 
raw  materials,  land,  tools,  etc. — get  their  prices?  This  we 
have  answered  previously:  from  the  expected  income  or 
prices  of  their  yield.  The  business  enterpriser  is  a  middle- 
man who  buys  to  sell  again.  He  buys  all  the  services  of 
the  factors  and  converts  these  into  a  product  which  is  sold 
at  such  a  price  as  it  will  bring.  Does  he  make  a  profit? 
Only  when  his  costs  are  less  than  his  selling  price.  Assur- 
edly it  is  not  his  costs  which  fix  his  selling  price;  rather  it 
is  the  selling  price  which  justifies  and  determines  the 
amount  of  cost  which  the  business  man  will  make  to  get 
a  good. 

15.  Selling  below  cost  is  sometimes  advisable.  When 
Congress  was  considering  the  measure  to  appropriate 
$11,000,000  for  a  manufactory  of  armor-plate,  the  Beth- 
lehem Steel  Company  fought  the  measure  chiefly  because 
it  would  render  their  equipment  for  the  same  purpose 
worthless,  or  practically  so.     It  seems  that  stockholders 


188  Introduction  to  Economics 

had  invested  some  $7,000,000  in  the  plant  for  the  output 
of  armor-plate.  This  company,  in  my  judgment,  over- 
came every  reasonable  contention  of  the  Government  by 
offering  to  produce  armor-plate  at  any  price  which  the 
Government  itself  might  set.  Why  such  an  offer  ?  Simply 
because  it  is  better  to  get  something  than  nothing  out  of 
the  huge  investment  made  in  good  faith  by  the  stockhold- 
ers, and  made,  too,  at  the  behest  of  the  Government.  It 
is  good  sense  to  sell  below  cost  rather  than  to  suffer  a  total 
loss.  Many  obstinate  or  otherwise  foolish  merchants  have 
been  marked  with  ruin  because  rather  than  do  this  they 
prefer  to  hold  goods  until  out  of  season. 

Although  prices  are  not  determined  by  cost,  yet  cost 
may  affect  prices  by  affecting  supply.  When  the  producer 
anticipates  a  high  future  price  for  hats  he  will  undergo  a 
large  cost  in  the  construction  of  equipment  to  produce  hats 
for  sale  at  the  high  prices.  The  result  of  this  large  equip- 
ment will  be  a  larger  supply  of  hats.  Cost  of  present  con- 
struction, though  determined  by  anticipated  prices,  cannot 
but  bear  on  future  price.  The  anticipated  price  determines 
cost,  which  in  turn  has  an  effect  on  supply  and  price. 

16.  Joint  cost1  is  found  in  the  numerous  examples  where 
the  same  operation  which  turns  out  one  commodity  turns 
out  others  also.  One  cannot  produce  mutton  without 
growing  wool,  nor  produce  cotton  fibre  without  cotton- 
seed. If  one  grows  beef,  he  cannot  but  add  to  the  supply 
of  hides,  horns,  bones,  fat,  etc. 

If  there  be  no  material  change  in  the  demand  for  cotton- 
seed, how  would  a  growing  demand  for  the  fibre  affect  the 
price  of  the  seed  ?  A  growing  demand  for  the  fibre  would 
push  its  price  up,  would  cause  an  increase  in  its  produc- 

1  F.  W.  Taussig,  "  Principles  of  Economics,"  I,  ch.  16. 


Supply  189 

tion,  with  the  consequence  that  the  increased  supply  of 
seed  relative  to  the  demand  would  lower  the  price  of  the 
seed. 

The  effect  of  the  same  cost  outlay  is  both  fibre  and  seed. 
The  combined  price  of  both  products  determines  the 
amount  of  cost  one  will  make  to  produce  them.  On  the 
average  there  is  a  dollar's  worth  of  seed  to  ten  dollars' 
worth  of  fibre,  so  by  utilizing  the  seed  one  gets  eleven 
dollars  every  time  he  would  get  ten  dollars  were  the  seed 
wasted.  The  planter  can  afford  a  larger  outlay  to  get  the 
eleven  dollars.  In  other  words,  the  saving  of  the  seed 
causes  a  larger  output  and  consequently  a  lower  price  of 
fibre.  Every  chemical  discovery  or  mechanical  device 
which  increases  the  joint  products  or  the  by-products  of 
a  plant  tends  to  lower  the  price  and  to  increase  the  supply 
of  any  one  of  the  joint  products. 

17.  Movements  in  Market  Supply. — It  is  now  clear  that 
a  rise  in  price  causes  an  increase  in  market  supply  in  two 


— Total  stock  of  corn 

— Market  supply  or  number  of  sale* 

at  the  market  price. 
.—Supply 


Figure  3 

ways:  more  sellers  are  brought  into  the  market,  and  each 
seller  will  convert  a  larger  portion  of  his  supply  into  mar- 
ket supply. 

In  the  last  chapter  we  saw  that  the  market  demand 


190  Introduction  to  Economics 

may  be  increased  in  two  ways:  skilful  salesmanship  may 
extend  the  market  demand  and  thus  without  lowering  the 
price  increase  the  volume  of  sales,  or  the  market  demand 
may  be  increased,  due  to  an  increase  in  price  offers;  these 
offers  being  higher,  not  more  in  number.  Market  supply 
may  be  enlarged  in  other  ways  than  by  an  increase  in 
price.  If  the  owners  of  grain  should  anticipate  a  fall  in 
price,  they  would  convert  a  larger  portion  of  their  supply 
into  market  supply  at  the  prevailing  prices.  Again,  im- 
proved methods  of  production  or  a  want  of  storage  facili- 
ties would  encourage  them  to  extend  the  market  supply. 
More  frequently,  however,  the  market  supply  is  increased 
because  of  a  rise  in  price. 

18.  Movements  in  Supply  Curve. — A  graphic  represen- 
tation of  an  increase  in  the  number  of  sales  which  suppliers 
will  be  willing  to  make  at  the  different  levels  of  price  will 
be  seen  in  a  shifting  to  the  right  of  the  supply  curve  (as  in 
Figure  4). 

Figure  5  shows  a  change  in  which  suppliers  will  diminish 
the  number  of  sales  they  would  be  willing  to  make  at  the 
different  levels  of  prices. 

Generalizing,  as  Davenport  puts  it,  the  language  of  plot- 
ting: With  stationary  supply,  the  demand  curve  moving 
up  or  to  the  right  must  mean  higher  prices;  moving  to  the 
left  or  down,  lower  prices. 

With  stationary  demand,  the  supply  curve  moving  up 
or  to  the  left  means  higher  prices;  moving  to  the  right  or 
down,  lower  prices. 

With  both  curves  moving,  the  possible  combinations  and 
the  different  price  adjustments  are  indefinitely  numerous. 

19.  Recapitulation. — Productive  capacity  or  the  source 
of  supply  consists  of  the  co-ordinating  of  natural  resources, 


Supply 


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10 


192  Introduction  to  Economics 

technological  equipment,  labor,  and  scientific  knowledge. 
A  large  productive  capacity  brings  forth  abundant  supply, 
and  vice  versa.  Demands  are  the  directing  forces  as  to 
what  classes  of  supply  we  shall  produce,  and  productive 
capacity  fixes  an  elastic  limit  to  these  supplies.  If  graz- 
ing-land  is  scarce  there  will  be  few  cattle,  few  hides,  and 
scarce  leather.  The  different  demands  for  leather  affect 
one  another.  A  large  demand  by  the  harness-makers 
means  a  smaller  supply  of  leather  for  shoes.  The  various 
demands  operating  under  a  competitive  price  regime  main- 
tain through  an  automatic  adjustment  a  grand  proportion 
and  balance  among  all  classes  of  supply. 

During  the  next  moment  our  demands  may  change,  but 
at  the  present  moment  they  may  be  considered  as  fixed. 
To  meet  these  is  a  large  number  of  different  limited  sup- 
plies. These  are  physically  limited  by  the  physically  lim- 
ited productive  powers  in  agents.  Because  of  the  physical 
limitation  of  these  supplies,  the  goods  of  which  they  are 
composed  command  prices.  It  is  the  task  of  the  entre- 
preneur to  get  together  the  essential  factors  to  secure 
these  marketable  products.  He  can  get  together  and  con- 
trol these  factors  only  by  paying  such  prices  as  their  ser- 
vices will  bring  for  the  time  he  uses  them.  What  he  pays 
for  them,  expressed  in  terms  of  money,  is  the  cost  of  pro- 
ducing the  goods.  If  he  sells  below  the  cost  of  produc- 
tion, he  fails  in  business;  if  he  sells  above,  he  makes  a 
profit.  Then,  what  determines  the  cost  he  can  afford  to 
pay?  There  is  but  one  answer;  it  is  the  selling  price  of 
the  product. 

20.  Exercises. — i.  What  effect  upon  the  supply  of  auto- 
mobiles would  be  caused  by  a  large  production  of  agricul- 


Supply  193 

tural  and  manufactured  products?  Were  you  a  cabinet- 
maker, what  would  you  care,  so  far  as  your  personal  inter- 
ests are  concerned,  if  the  wheat-crop  should  fail? 

2.  What  is  meant  by  a  fixed  supply?  Suppose  that 
there  are  2,500  pieces  of  a  particular  kind  of  seventeenth- 
century  furniture,  and  that  of  these  1,000  are  for  sale.  Is 
the  fixed  supply  2,500  or  1,000? 

3.  What  theory  of  price  is  controverted  by  the  above 
statement  (paragraph  4)  of  Senior  ? 

4.  Does  the  cost  of  producing  a  thing  determine  its 
price,  or  is  it  the  price  of  a  thing  which  determines  the 
cost  that  will  be  made  to  produce  it  ? 

5.  Explain  this  statement:  "Cost  is  the  price  expression 
of  the  limitation  of  productive  agents."  State  the  funda- 
mental cause  why  champagne  or  copper  is  dear.  In  an- 
swering this,  consider  (a)  the  demand  for  these,  (b)  their 
cost  of  production,  (c)  the  limited  productive  capacity. 

6.  How  does  the  production  of  ships  and  munitions  to 
meet  war  demands  affect  other  supplies,  such  as  cotton 
cloth,  mutton,  automobiles,  and  shoes? 

7.  Define  opportunity  cost;  state  different  kinds  of  such 
cost;  explain  its  effect  upon  the  limitation  of  any  supply; 
give  its  bearing  upon  the  proper  economic  adjustment  of 
supplies  to  one  another. 

8.  How  are  present  supplies  related  to  costs  in  time 
past?     Does  it  ever  pay  to  sell  below  cost? 

9.  Define  joint  cost.  The  demand  for  hides  remaining 
the  same,  what  would  be  the  ultimate  effect  on  the  price 
of  hides  should  there  be  a  vast  increase  in  the  demand  for 
beef? 

10.  What  is  the  relationship  between  limited  pasture- 
lands  and  the  price  of  beef?  How  might  a  sufficient  rise 
in  the  price  of  beef  affect  the  amount  of  land  used  for  pas- 
ture? Is  this  a  change  in  the  supply  of  land?  in  the 
supply  of  pastureland  ? 

n.  A  false  bottom  was  put  into  an  elevator-bin  so  that 
it  held  50  bushels,  when  it  was  supposed  to  hold  10,000. 


194  Introduction  to  Economics 

What  was  the  effect  on  the  market  price  of  wheat  ?     (Sum- 
ner.) 

12.  Suppose  a  considerable  rise  in  the  price  of  wool  to 
be  foreseen,  how  would  farmers  expect  the  prices  of  mut- 
ton, beef,  and  hides,  respectively,  to  be  affected,  and  why  ? 
(Sumner.) 

13.  A  manufacturer  is  prepared  to  produce  a  large 
amount  of  paper,  but  he  decides  to  defer  production  even 
though  his  plant  will  be  idle  for  a  time,  and  his  future  cost 
will  be  larger.  He  reasons  that  the  market  is  not  yet 
ready  for  the  paper,  that  the  effect  of  his  having  a  large 
amount  in  store  will  be  that  buyers  will  defer  their  pur- 
chases and  maintain  a  low  price.  Buyers  will  try  to  our- 
wait  him,  knowing  that  he  cannot  afford  to  hold  the  idle 
stock  indefinitely. 

(a)  Do  you  agree  with  his  reasoning? 

(b)  What  counter  arguments  might  be  made  ? 

(c)  What  economic  principle  is  involved  ? 


CHAPTER   X 
MONEY   AND   ITS   PURCHASING   POWER 

i.  Money  and  price.  2.  Money  in  exchange.  3.  Barter  and  need  for 
money.  4.  What  is  money?  5.  The  definition  explained.  6.  Functions 
of  money.  7.  Credit,  currency,  cash.  8.  Qualities  of  good  money.  9. 
Coinage.  10.  Free,  unlimited,  gratuitous  coinage,  n.  Money  exchanged 
by  weight  and  by  count.  12.  Seigniorage.  13.  Seigniorage  and  the  pur- 
chasing power  of  money.  14.  Other  illustrations.  15.  Seigniorage  in  the 
monetary  system  of  the  United  States.  16.  Monetary  system  of  the 
United  States,  1915.  17.  The  mint  price  and  the  market  price  of  gold 
bullion.     18.  Convertibility  of  money.     19.  Exercises. 

i.  Money  and  Price. — Price,  we  have  seen,  is  the  amount 
of  a  thing,  money  or  other,  given  in  exchange  for  another 
thing.  But  prices  are  generally  thought  of  and  expressed 
in  money.  Reasoning  on  prices,  then,  must  include  an  ex- 
amination of  the  influences  which  determine  the  exchange 
powers  of  money.  It  is  at  once  evident  that  if  money  is 
extremely  scarce  while  corn  exists  in  great  abundance,  very 
little  money  would  be  given  for  a  bushel;  that  is  to  say,  the 
price  of  corn  would  be  low.  On  the  contrary,  were  money 
abundant  while  corn  is  scarce,  it  would  require  much  more 
money  to  buy  a  bushel;  the  price  would  be  high.  This 
does  not  differ  in  principle  from  exchanges  in  which  no 
money  is  involved.  If  at  the  same  time  we  have  a  scarcity 
of  grain  and  the  yards  are  congested  with  cars  full  of  coal 
for  which  there  is  no  market,  a  bushel  of  corn  would  com- 
mand a  large  supply  of  coal  in  exchange. 

In  order  to  account  for  the  money  price  of  goods,  account 
must  be  taken  of  the  supply  of  money,  as  well  as  of  the 

'   195 


196  Introduction  to  Economics 

supply  of  goods.  It  will  be  the  purpose  of  this  chapter 
to  point  out  some  determining  influences  on  the  purchasing 
powers  of  money.  The  purchasing  power  of  money  is  of 
such  significance  that  we  shall  devote  the  following  chap- 
ter also  largely  to  this  subject.  The  chapters  immediately 
preceding  this  have  had  to  do  with  influences  which  deter- 
mine the  supply  of  and  the  demand  for  goods.  The  money 
price  of  a  good  depends  upon  two  things;  the  supply  of 
and  demand  for  the  good  and  the  purchasing  power  of 
money. 

2.  Money  in  Exchange. — In  an  economy  of  self-suffi- 
ciency the  choice  as  to  what  one  produces  is  determined 
by  his  personal  wants.  In  an  economy  of  interdependence 
and  trade,  such  as  we  know,  the  choice  as  to  what  one  pro- 
duces is  determined  by  abilities  and  aptitudes.  The  self- 
sufficing  family  produces  its  own  clothing,  food,  and  drink. 
The  laborer  in  an  exchange  economy  throws  his  product 
upon  the  market,  let  who  will  consume  it.  He,  in  turn, 
looks  to  the  products  of  others  for  the  means  of  gratifying 
his  own  desires. 

The  producers  offer  their  several  products  for  sale  upon 
the  market,  these  same  producers  become  consumers,  buy- 
ing in  the  market  such  necessities,  comforts,  and  luxuries 
as  their  desires,  fancies,  or  caprices  may  dictate.  In  the 
market  exchanges  take  place  and  the  consequence  of  these 
exchanges  is  the  division  of  labor.  The  virtue  of  exchange 
is  that  it  brings  about  a  division  of  labor,  and  the  virtue 
of  a  division  of  labor  is  that  it  enlarges  production.  Ex- 
change facilitates  or,  to  speak  more  accurately,  makes  pos- 
sible a  minute  division  of  labor  with  its  consequences. 
Exchange  in  its  turn  is  facilitated  or,  better  yet,  made 
possible  by  the  great  agent  of  exchange — money. 


Money  and  Its  Purchasing  Power        197 

3.  Barter  and  Need  for  Money. — Could  a  community  in 
which  no  exchanging  takes  place  enjoy  a  division  of  labor? 
Yes,  but  under  an  entirely  different  economic  order  from 
that  in  which  we  now  live.  It  would  be  possible  for  the 
different  members  of  a  communistic  society  to  follow  tasks 
to  which  their  talents  are  adapted,  should  they  distribute 
the  products  of  the  community,  giving  to  each  according 
to  his  need.  They  would  share  the  income  of  the  com- 
munity in  the  same  way  that  the  family  to-day  distributes 
its  income  without  money  and  without  price.  The  divi- 
sion of  labor  under  existing  circumstances  requires  per- 
sons to  get  together  in  exchange,  or  else  go  without  needed 
supplies. 

Exchanges  there  must  be,  but  exchanges  would  in  all 
instances  be  hampered  and  in  many  cases  would  be  im- 
possible without  the  use  of  money.  Even  in  cases  of  bar- 
ter, goods  traded  for  goods,  each  of  the  goods  traded  is 
evaluated  in  terms  of  the  money  unit,  in  order  to  deter- 
mine the  ratio  of  exchange  between  these  goods.  For  in- 
stance, suppose  that  the  manufacturer  of  pianos  could 
not  resort  to  the  use  of  money  to  effect  his  exchanges,  he 
would  find  difficulty  in  trading  his  product  for  the  inexpen- 
sive commodities  of  every-day  use — salt,  coffee,  bread, 
and  the  small  articles  of  merchandise.  There  would  be 
many  persons  who  would  desire  a  piano,  but  who  would 
not  have  the  articles  needed  by  the  piano-maker.  Or  if 
one  is  found  who  possesses  all  or  any  of  these  articles  it 
would  be  difficult,  if  not  impossible,  to  work  out  an  exact 
price  equivalent  as  between  the  piano  and  the  goods  to  be 
given  in  exchange  for  it. 

Some  goods  are  more  barterable  than  others.  Could 
the  piano-maker  first  exchange  his  product  for  a  very  bar- 


198  Introduction  to  Economics 

terable  commodity,  one  for  which  all  would  be  willing  to 
exchange  whatever  goods  they  might  have  for  sale,  he 
would  experience  little  difficulty  in  obtaining  the  several 
commodities  of  his  desire. 

4.  What  Is  Money? — We  may  first  note  how  money 
may  not  be  defined.  It  cannot  be  defined  by  telling  what 
it  is  made  of.  It  is  no  definition  to  say  that  the  money 
unit — the  dollar — contains  23.22  grains  of  pure  gold.  Dif- 
ferent commodities  have  been  used  as  money:  Knives  were 
formerly  used  as  money  in  China;  tobacco  served  the  same 
function  in  Virginia;  some  other  commodities  that  have 
served  this  function  are  wheat,  bark,  cattle,  iron,  and  shells. 

These  examples  show  also  that  there  is  no  particular 
shape,  size,  or  weight  which  money  must  have. 

Money,  furthermore,  cannot  be  made  by  law.  Tobacco 
in  Virginia  was  money  before  it  was  so  legally  defined.  A 
loaf  of  bread  would  not  become  a  dollar  should  we  affix  a 
government  stamp  bearing  these  words:  "This  is  a  dollar 
— in  God  we  trust."  The  law  may  declare  a  thing  "legal 
tender"  which  will  not  be  accepted  as  money.  If  the  law 
declares  some  commodity  to  be  money  which  debtors  may 
tender  in  the  full  discharge  of  debts  and  which  creditors 
are  compelled  to  accept,  the  contracts  between  debtors 
and  creditors  may  specify  that  payment  shall  be  made  in 
something  else. 

To  declare  a  thing  legal  tender  may  not  render  it  valu- 
able. Continental  notes  were  legal  tender,  yet  they  were 
so  worthless  as  to  give  us  the  expression,  "not  worth  a 
continental."  There  may  be  money  which  does  not  have 
the  quality  of  legal  tender.  A  slight  error  crept  into  the 
monetary  bill  for  the  Philippine  Islands  which  failed  to 
define  small   change   as  legal   tender.     The   people  were 


Money  and  Its  Purchasing  Power        199 

probably  unaware  of  the  oversight;  or  if  they  were  it  was 
a  matter  of  no  consequence.  Small  change  was  used  at 
the  post-offices,  banks,  and  in  general  circulation.  What 
is  more,  a  commodity  may  be  money  in  the  full  sense  of 
that  word,  and  at  the  same  time  be  counterfeit,  and  every- 
one may  know  that  it  is  counterfeit.  The  Philippines  fur- 
nish another  instance.  Copper  is  found  in  an  almost  pure 
state  in  one  place— for  all  I  know,  in  several  places — in  the 
hills,  and  the  natives,  at  the  time  of  the  American  occu- 
pancy, had  long  been  accustomed  to  mine,  pound  into 
shape,  and  use  this  copper  as  money.  Centavas  (a  copper 
piece  worth  the  half  of  an  American  cent)  possessed  the 
highest  degree  of  acceptability,  and  was  common  currency, 
despite  the  fact  that  all  knew  it  to  be  counterfeit. 

Anything — counterfeit  or  of  legal  sanction,  legal  tender 
or  not — which  is  generally  acceptable  carries  with  it  a 
function  beyond  and  in  addition  to  its  ordinary  natural 
function.  If  copper  becomes  generally  acceptable,  it  takes 
on  a  function  in  addition  to  the  uses  made  of  it  in  the  in- 
dustrial arts.  And  this  additional  function  is  the  money 
function.  Whatever  acquires  this  function  becomes  a 
medium  of  exchange. 

The  word  "medium"  deserves  particular  emphasis  here. 
The  copper  ceases  to  be  an  end  in  itself  and  becomes  a 
means  to  an  end,  "an  intermediate  thing  in  the  commerce 
between  the  producers  and  consumers  of  any  and  of  every 
article."  The  seller  accepts  the  copper  with  no  other 
end  in  view  than  that  of  passing  it  on  in  payment  to 
another  seller. 

The  function  described  is  the  money  function:  money  is 
the  medium  of  exchange.  How  define  it?  Money  is  that 
which  passes  freely  from  hand  to  hand  throughout  the  com- 


200  Introduction  to  Economics 

munity,  in  payment  for  goods  and  in  full  discharge  of  debts, 
being  accepted  without  reference  to  the  character  or  credit  of 
the  person  offering  it,  and  without  the  intention  of  the  person 
who  receives  it  to  consume  it  otherwise  than  in  tendering  it  to 
others. 

5.  The  Definition  Explained. — The  long  definition  just 
given  embodies  a  number  of  points  which  deserve  special 
mention.  The  money  function  is  the  kernel  of  this  defi- 
nition. That  very  able  and  gifted  writer,  F.  A.  Walker, 
had  this  in  mind  when  he  said:  "Whatever  performs  this 
function,  does  this  work,  is  money,  no  matter  what  it  is 
made  of,  and  no  matter  how  it  comes  to  be  a  medium  at 
first,  or  why  it  continues  to  be  such.  So  long  as,  in  any 
community,  there  is  an  article  which  all  producers  take 
freely  and  as  a  matter  of  course,  in  exchange  for  whatever 
they  have  to  sell,  instead  of  looking  about,  at  the  time,  for 
the  particular  things  they  themselves  wish  to  consume, 
that  article  is  money,  be  it  white,  yellow,  or  black,  hard 
or  soft,  animal,  vegetable,  or  mineral.  There  is  no  other 
test  of  money  than  this.  That  which  does  the  money- 
work  is  the  money- thing.  It  may  do  this  well;  it  may  do 
this  ill.  It  may  be  good  money;  it  may  be  bad  money — 
but  it  is  money  all  the  same."  1 

Some  writers  say  that  money  must  be  of  full  commodity 
value,  but  the  above  definition  pays  no  regard  to  what 
money  is  made  of,  says  nothing  of  the  exchange  power  of 
the  commodity  used  to  make  money.  It  defines  money  in 
terms  of  what  money  does — it  would  know  the  doer  by 
what  it  does.  It  would  include  all  media  of  exchange 
whether  paper  or  coin — it  is  enough  that  it  be  generally 
acceptable.     It  would  not  include  checks,   because  they 

Political  Economy,  Advanced  Course,  p.  123. 


Money  and  Its  Purchasing  Power        201 

are  not  generally  acceptable,  do  not  pass  freely  from  hand 
to  hand,  are  not  accepted  without  reference  to  the  char- 
acter or  credit  of  the  person  offering  them.  The  definition 
is  not  burdened  with  overrefinement,  it  corresponds  to 
popular  usage,  and  is  workable. 

6.  Functions  of  Money. — What  does  money  do?  To 
answer  this  question  is  to  give  the  functions  of  money.  To 
serve  as  a  common  medium  of  exchange  is  its  primary  func- 
tion, other  functions  are  derivative  from  this.  A  pen  or  a 
watch  performs  a  specific  service  and  is  wanted  for  no 
other  purpose.  Money  likewise  is  a  simple  tool  desired 
for  the  one  purpose  of  making  exchanges  and  none  other. 
Money  is  no  mysterious  thing,  no  mystic  principles  veil 
or  obscure  it;  it  is  a  tool  for  making  exchanges,  just  as  a 
hammer  is  a  tool  for  driving  nails. 

Money  is  a  standard  or  common  denominator  of  value 
or,  more  accurately,  a  standard  of  the  relative  prices  of 
goods.  This  is  a  derived  function,  although  many  writers 
class  it  with  the  first-mentioned,  and  speak  of  these  as  the 
two  primary  functions.  This  error  is  easily  disposed  of, 
for  a  thing  could  not  serve  as  a  standard  of  value  unless  it 
be  a  medium  of  exchange.  Strictly  speaking,  money  is 
not  a  standard  of  value  as  between  persons.  It  would  be 
a  curiously  poor  yardstick,  wheh  is  two  feet  long  in  one 
man's  hands  and  ten  feet  long  in  the  hands  of  another. 
But  something  comparable  to  th's  is  true  in  the  case  of 
the  dollar,  for  it  reflects  large  marginal  desirability  for  the 
poor  and  little  for  the  rich.  Considered  from  the  stand- 
point of  one  person,  the  dollar  does  serve  as  a  measure  of 
the  comparative  worth  of  different  commodities.  The  in- 
dividual measures  the  relative  valuations  of  corn  and 
wheat  by  bringing  these  in  comparison  with  the  value  he 


202  Introduction  to  Economics 

attributes  to  a  unit  of  money.  If  for  him  the  marginal 
desirability  of  a  bushel  of  corn  and  the  alternative  use  of 
a  dollar  are  equivalent,  while  the  marginal  desirability  of 
a  bushel  of  wheat  would  be  the  equivalent  of  two  dollars, 
he  would  here  have  measured  the  values  attributed  to 
two  commodities,  finding  the  one  to  be  double  that  of  the 
other.  As  between  persons,  however,  money  serves  sim- 
ply as  a  measure  of  price. 

The  third  function  of  money,  likewise  derived  from  the 
first  mentioned,  is  that  of  a  storehouse  of  general  purchas- 
ing power.  When  we  speak  of  purchasing  power  being 
stored  in  money  we  do  not  imply  that  value  is  something 
intrinsic  in  money;  we  mean  that  money  is  a  durable  thing 
and  that  it  is  always  salable. 

The  fourth  function  of  money  is  very  similar  to  the 
third:  it  is  a  standard  of  deferred  payments.  The  pur- 
chaser defers  payment  when  he  buys  goods  on  credit;  the 
borrower  defers  payment  when  he  borrows  from  a  bank; 
in  any  case  payment  is  deferred  when  a  debt  is  made.  If 
one  borrows  $1,000  for  one  year's  time,  he  agrees  simply 
to  return  the  $1,000  plus  the  interest;  he  does  not,  except 
in  rare  instances,  agree  to  pay  back  as  much  purchasing 
power  as  he  borrowed.  As  a  little  reflection  will  show, 
this  introduces  a  point  of  great  significance.  Let  us  sup- 
pose that  one  had  borrowed  in  the  year  191 5  $1,000,  which 
he  agreed  to  repay  in  1920.  Assume  further  that  in  this 
five  years  prices  double,  that  in  1920  it  will  take  $2  to 
buy  the  same  goods  which  $1  would  have  bought  in  19 15. 
What  would  be  the  consequences  ?  As  much  money  would 
be  returned  as  was  borrowed;  the  debt  would  be  paid  in 
legal  tender  and,  therefore,  legally  cancelled.  The  obliga- 
tion would  be  cancelled,  dollar  for  dollar  returned,  while 


Money  and  Its  Purchasing  Power        203 

but  one-half  of  the  purchasing  power  would  be  repaid. 
But  this  is  not  all,  for  the  creditor  has  been  affected  with 
a  serious  injustice,  and  the  debtor  has  enjoyed  an  unearned 
benefit. 

Money  (and  this  is  the  last  function  to  be  mentioned, 
although  it  certainly  is  not  a  distinct  function)  is  used  as 
the  reserves  of  banks.  Notes  and  checks  are  based  on 
bank  deposits  or  reserves.  Bank  reserves  form  the  basis 
of  the  credit  structure. 

7.  Credit,  Currency,  Cash. — Popular  usage  makes  money, 
credit  instruments,  currency,  and  cash  synonymous,  but 
there  are  differences  in  the  meanings  of  these  terms. 

Credit:  There  could  be  no  credit  apart  from  confidence. 
When  a  buyer  of  goods  or  services  makes  a  promise  to  pay 
at  a  later  date,  he  is  trusted  or  given  credit.  This  credit 
is  evidenced  by  written  promises  or  contracts  to  pay,  these 
written  contracts  being  called  credit  instruments.  Credit 
instruments  are  unconditional  promises  to  pay  money  on 
demand  or  at  a  specified  future  time.  Certain  credit  in- 
struments, bank-notes  for  example,  become  generally  ac- 
ceptable throughout  the  community;  and  since  they  come 
to  do  the  money -work,  they  are  therefore  the  money-thing. 
This  type  of  money  is  called  "representative  money"  by 
some  and  " fiduciary  money"  by  others. 

Currency:  Certain  goods  acquire  through  custom  a  high 
degree  of  marketability;  these  are  money  or  closely  ap- 
proximate it.  Goods  or  instruments  with  a  high  degree 
of  marketability  serve  as  circulating  media  or  currency. 
Currency  includes  primary  money  (gold  in  the  United 
States,  which  is  back  of  all  other  forms  of  money),  fiduciary 
money  (which  is  backed  by  primary  money),  and  bank 
deposits. 


204  Introduction  to  Economics 

Cash:  Some  forms  of  currency  such  as  checks  drawn 
against  bank  deposits  are  of  limited  acceptability.  Cash 
always  means  "ready  money."  Generally  speaking,  cash 
is  a  synonym  for  currency. 

8.  Qualities  of  Good  Money. — An  essential  quality  of 
good  money  is  stability,  because  movements  in  the  purchas- 
ing power  of  money  are  always  troublesome.  If  a  com- 
modity maintain  the  same  exchange  power  through  time, 
its  money  price  will  vary  with  every  variation  in  the  pur- 
chasing power  of  money.  If  wheat  is  priced  at  one  dollar 
the  farmer  borrows  the  equivalent  of  1,000  bushels  of  his 
product  when  he  borrows  $1,000.  Assume  the  exchange 
power  of  wheat  relative  to  other  goods  to  be  stable  for  the 
period  of  a  loan,  yet  it  is  possible  for  the  price  to  drop 
from  a  dollar  to  fifty  cents,  because  of  an  increase  in  the 
purchasing  power  of  money.  In  this  case  the  farmer 
would  have  borrowed  the  equivalent  of  1,000  bushels  of 
his  product  and  would  be  compelled  to  return  in  payment 
the  equivalent  of  2,000  bushels  of  his  product.  Or  assume 
that  two  bushels  represent  a  day's  labor;  he  would  have 
borrowed  the  product  of  500  days'  labor,  paying  for  it  the 
product  of  1 ,000  days'  labor.  On  the  contrary,  should  the 
purchasing  power  of  the  money  unit  be  diminished  by  one- 
half,  the  wheat  would  double  in  price,  and  the  farmer 
would  return  the  product  of  only  250  days'  labor. 

Money  should  also  be  uniform  in  purchasing  power.  If 
there  were  no  fixed  relationship  in  purchasing  power  of 
coins,  or  should  there  be  a  lack  of  uniformity  in  the  pur- 
chasing power  and  appearance  of  notes  coming  from  banks 
in  different  sections  of  the  country,  there  would  be  no  end 
of  confusion,  both  in  current  transactions  and  in  deferred 
payments. 


Money  and  Its  Purchasing  Power        205 

Money  should  be  elastic  in  order  that  it  may  be  adjusted 
to  the  varying  needs  of  trade.  Inelasticity  has  been  the 
most  serious  defect  in  our  monetary  system.  Hard  money 
cannot  be  coined,  thrown  into  circulation,  and  withdrawn 
with  the  changing  demands  of  trade.  Elasticity  is  to  be 
looked  for  through  the  expansion  and  contraction  of  notes. 

Money  should  be  in  convenient  denominations  in  order 
that  it  may  be  adaptable  to  all  transactions,  to  large  busi- 
ness deals  and  petty  purchases.  Many  have  argued  in 
favor  of  a  half-cent  piece  in  order  to  still  further  adapt 
money  to  current  needs. 

Money  should  be  convenient  to  handle.  If  the  dollar 
were  made  of  iron  it  would  be  too  bulky.  We  no  longer 
coin  the  single  gold  dollar,  because  it  is  too  small  for  gen- 
eral convenience. 

Money  should  be  beautiful,  easy  to  recognize,  difficult  to 
counterfeit.  It  should  be  made  of  substance  which  is  im- 
pressable,  or  capable  of  taking  and  holding  the  impression 
or  die.  It  should  be  of  such  shape  and  hardness  as  to 
make  it  difficult  or  impossible  to  remove  a  portion  of  the 
metal  without  defacing  the  coin.  Coins  are  made  harder 
by  the  addition  of  alloy.  Small  coins  should  contain  a 
large  per  cent  of  alloy,  because  they  get  more  wear  than 
large  coins.  In  a  dollar's  worth  of  small  coins  there  is 
much  more  surface  exposed  to  friction  and  wear  than  in  a 
single  dollar-coin. 

Money  should  be  durable.  No  perishable  commodity 
could  serve  as  a  standard  of  deferred  payments  or  as  a  store- 
house for  saving. 

9.  Coinage  is  the  process  of  converting  bullion  into 
coin.  When  a  government  stamps  a  piece  of  metal,  cer- 
tifying its  weight  and  fineness,  the  process  is  known  as 


206  Introduction  to  Economics 

coinage.  Coinage  is  a  matter  of  convenience;  no  questions 
are  asked  when  one  tenders  a  gold  coin  in  payment.  The 
people  accept  a  coin  by  tale  or  count  when  the  government 
by  means  of  its  stamp  has  certified  as  to  its  weight  and 
fineness.  One  would  appreciate  the  necessity  for  coinage 
were  he  compelled  to  carry  around  the  necessary  acids, 
retort,  and  scales  to  test  and  weigh  the  proper  amounts  of 
the  precious  metals  used  in  his  current  purchases.  The 
fact  that  coins  are  accepted  at  face  value  furnishes  tempta- 
tion to  the  counterfeiter,  because  he  knows  that  a  similar 
stamp  on  a  baser  metal  would  pass  current.  The  clipper, 
likewise  the  sweater,  is  also  tempted,  for  if  he  can  abstract 
part  of  the  metal  in  such  a  way  as  not  to  disfigure  the  coin, 
it  will  continue  to  pass  at  full  face  value.  Improvements 
in  the  art  of  coinage  have  been  stimulated  by  the  presence 
of  potential  counterfeiters.  At  first  coins  were  stamped  on 
but  one  side,  later  both  sides  were  stamped,  so  that  the 
stamp  would  be  defaced  in  a  process  of  removing  a  portion 
of  the  metal.  The  edges  were  milled  to  defeat  the  work 
of  the  clipper.  The  sweater's  task  is  made  hard  by  a  pro- 
vision for  the  recoinage  of  pieces  showing  natural  wear,  so 
that  a  worn  coin  is  an  object  of  public  distrust. 

The  medium  of  exchange  must  have  universal  accepta- 
bility, and  this  it  cannot  have  unless  it  maintains  the  full 
confidence  of  the  people.  A  country's  monetary  system 
pervades  the  whole  life  of  the  community.  So  significant 
is  coinage  that  governments  everywhere  single  out  coinage 
as  a  particular  process  to  be  monopolized  by  the  sovereign 
power  of  the  State,  and  counterfeiting  is  made  an  offense 
against  the  government. 

10.  Free,  Unlimited,  Gratuitous  Coinage. — Many  people 
have  the  idea  that  free  coinage  means  simply  that  a  person 


Money  and  Its  Purchasing  Power        207 

may  have  his  bullion  converted  into  coin  free  of  charge. 
This  would  be  true  in  case  of  gratuitous  coinage,  but  not 
in  case  of  free  coinage.  We  are  said  to  have  free  coinage 
when  any  owner  of  bullion  is  at  liberty  to  have  it  coined 
on  the  same  terms  as  the  government,  or  as  any  other 
citizen.  There  may  or  may  not  be  a  charge  for  the  opera- 
tion. We  have  the  free  coinage  of  gold  in  the  United 
States. 

Unlimited  coinage  has,  of  course,  just  the  opposite 
meaning  of  limited  coinage.  If  we  had  limited  coinage  of 
gold  the  government  would  specify  a  limit  to  the  amount 
of  coin  which  one  might  have  struck.  We  have  the  un- 
limited coinage  of  gold  in  the  United  States. 

Gratuitous  coinage,  as  above  implied,  means  that  the 
government  makes  no  charge  for  converting  bullion  into 
coin.     We  have  the  gratuitous  coinage  of  gold. 

n.  Money  Exchanged  by  Weight  and  by  Count. — In 
ancient  times  the  precious  metals  were  not  always  coined. 
They  were  used  as  money  in  bulk.  Exchanges  involving 
money  must  have  been  difficult  to  make  and  only  approxi- 
mately accurate,  for  the  metal  had  to  be  weighed  and 
tested.  Even  in  antiquity  there  was  some  coinage;  "pieces 
of  silver"  are  spoken  of  in  Genesis  (20  :  16,  37  :  28).  Also 
in  Genesis  reference  is  made  to  "money  in  full  weight" 
(32  :  21);  another  reference  is  to  "land  worth  four  hundred 
shekels  (224  grains  troy)  of  silver  .  .  .  and  Abraham 
weighed  to  Ephram  the  silver"  (Genesis  23  :  15,  16).  "And 
I  .  .  .  weighed  him  the  money  in  the  balances"  (Jeremiah 
32  :  10).  Reference  is  made  in  the  Bible  also  to  the  use  of 
gold  (Genesis  44  :  8)  and  brass  (Matthew  10  :  9)  as  money. 
The  probability  is  that  a  number  of  metals  were  used  as 
money  and  that  they  passed  for  the  most  part  by  weight. 


208  Introduction  to  Economics 

In  our  day  gold  bars  are  used  to  settle  international  bal- 
ances. 

The  exchange  of  coins  (exchange  by  count)  is  in  reality 
an  exchange  by  weight,  for  coins  are  but  pieces  of  metal 
stamped  to  indicate  their  weight  and  fineness.  The  Amer- 
ican dollar  is  23.22  grains  of  fine  gold  stamped.  In  1816 
the  English  Parliament  denned  the  pound  sterling  as  being 
113  grains  of  pure  gold,  and  that  definition  still  holds. 
The  American  gold  coin  is  nine-tenths  fine  and  the  English 
sovereign,  the  "pound,"  is  eleven- twelfths  fine.  The  par 
of  exchange  (the  ratio  of  fine  gold  in  them)  is  4.866;  that 
is,  that  number  of  dollars  contains  the  same  amount  of 
fine  gold  (113  grains)  as  an  English  pound. 

12.  Seigniorage  is  the  charge  which  the  government 
makes  for  converting  bullion  into  coin.  This  charge  may 
be  barely  sufficient  to  cover  the  actual  cost  of  coinage,  or 
it  may  be  large  enough  to  leave  a  surplus  above  the  cost 
of  coinage.  That  part  of  seigniorage  covering  the  actual 
cost  of  coinage  has  been  termed  brassage. 

Should  the  purchasing  power  of  a  coin  be  computed 
according  to  the  amount  of  the  bullion  contained  in  it,  or 
should  the  cost  of  mintage  be  added?  That  is  to  say,  if 
it  costs  5  cents  to  coin  a  $5  gold-piece,  should  it  contain 
500  cents'  worth  of  gold,  or  should  it  contain  only  495 
cents'  worth  of  bullion,  and  should  the  cost  of  coinage 
(5  cents)  be  added  in  to  make  up  the  $5?  Those  who 
answer  that  it  should  contain  only  495  cents'  worth  of 
bullion  argue  as  follows:  The  distinct  need  for  money 
gives  an  additional  purchasing  power  to  gold  which  has 
taken  the  form  of  coin.  As  a  piece  of  furniture  is  worth 
more  than  the  crude  lumber  of  which  it  is  made,  so  a  coin 
is  worth  more  than  the  bullion  contained  in  it.     If  a  pair 


Money  and  Its  Purchasing  Power        209 

of  shoes  is  worth  more  than  so  much  leather,  why  is  not 
a  coin  worth  more  than  so  much  bullion? 

What  is  more,  if  a  gold  coin,  say  $5,  has  five  dollars' 
worth  of  bullion  in  it,  what  is  to  prevent  its  being  melted 
down  when  occasion  arises?  The  metal  would  be  alter- 
nately coined  and  melted  down,  recoined  and  again  melted 
as  nec3ssities  dictate. 

It  is  evident  that  if  the  bullion-owner  were  asked  to 
give  500  cents'  worth  of  bullion  and  to  pay  in  addition  5 
cents  (making  505  cents'  worth  of  bullion),  he  would  either 
have  no  coining  done,  or  else  a  $5  coin  would  be  worth 
more  than  500  cents. 

In  connection  with  foreign  trade  another  question  would 
arise,  for  a  coin  containing  495  cents'  worth  of  bullion 
might  be  kept  in  circulation  at  its  face  value  (five  hundred 
cents)  in  the  country  of  its  issue,  but  it  would  buy  only 
495  cents'  worth  of  goods  from  another  country. 

13.  Seigniorage  and  the  Purchasing  Power  of  Money. — 
This  topic  suggests  a  significant  monetary  principle,  and 
in  order  that  this  principle  may  stand  out  more  boldly  I 
shall  avoid  confusing  it  with  a  multitude  of  considerations 
by  limiting  the  discussion  to  a  single  assumed  country. 
Assume  that  in  a  certain  country  the  monetary  transac- 
tions remain  about  constant,  and  that  1,000,000  coins, 
each  containing  100  grains  of  fine  gold,  are  required.  This 
would  involve  the  use  of  100,000,000  grains  of  gold  as 
money.  If  the  government  decides  to  charge  a  seigniorage 
of  1  per  cent,  it  may  take  one  grain  out  of  each  coin,  thus 
leaving  1,000,000  coins  in  circulation,  each  of  which  con- 
tains 99  grains  of  fine  gold.  Would  a  coin  now  pur- 
chase as  much  as  when  each  contained  100  grains?  It 
would,  for  there  would  be  no  increase  in  the  number  of 


210  Introduction  to  Economics 

coins,  and  no  decrease  in  the  demand  for  purposes  of  ex- 
change. 

"But  suppose  the  sovereign  proceeds  further,  and  takes, 
not  i  grain  but  10  from  every  hundred,  issuing  1,000,000 
pieces  of  only  90  grains  each.  Will  the  purchasing  power 
of  each  piece  be  affected?  Not  in  the  least.  There  is 
the  same  demand  for  pieces,  the  same  supply.  People  still 
want  pieces  of  money;  can  only  get  them  by  giving  com- 
modities for  them ;  have  as  many  commodities  and  no  fewer 
to  give;  and  there  are  just  as  many  pieces  and  no  more  to 
be  obtained  in  this  way."  ! 

Now,  assume  that  the  government  goes  to  the  full  limit 
of  seigniorage  and  takes  out  100  per  cent  of  the  bullion 
in  a  piece  of  money.  Will  a  piece  of  money  now  purchase 
as  much  as  before?  Yes,  on  one  condition,  and  one  only, 
namely,  that  there  be  no  alteration  in  the  supply  relative 
to  the  demand  for  money. 

The  reasoning  found  in  this  paragraph  was  clearly 
stated  by  the  great  thinker,  David  Ricardo,  over  a  century 
ago,  and  through  all  these  years  not  a  single  first-rate 
writer  on  the  subject  has  deviated  from  his  thought.  To 
present  the  whole  matter  in  a  word:  the  purchasing  power 
of  money  is  determined  by  the  demand  for  relative  to  the 
supply  of  money. 

14.  Other  Illustrations. — Assume  that  this  government 
charge  a  seigniorage  of  25  per  cent,  and  that  it  provides 
that  the  bullion  content  of  coins  should  not  be  diminished. 
What  would  be  the  immediate  effect  on  prices  ?  Inasmuch 
as  there  would  be  the  same  amount  of  money  and  the  same 
amount  of  money-work  to  be  done,  there  would  be  no 
immediate  change  in  prices.  Would  the  bullion-owner  be 
1  Walker's  Political  Economy,  Advanced  Course,  p.  147. 


Money  and  Its  Purchasing  Power        211 

encouraged  to  take  his  bullion  to  the  mint?  No,  because 
he  could  get  in  exchange  for  his  bullion  only  75  per  cent 
as  many  coins  as  before  the  enactment  of  the  law.  What 
would  be  the  effect  on  the  purchasing  power  of  a  coin 
should  the  monetary  demand  increase,  due  to  the  normal 
business  growth  of  the  community?  I  answer,  it  would 
increase.  The  purchasing  power  of  a  coin  would  continue 
to  grow  beyond  and  above  its  bullion  content  with  the 
growth  in  the  monetary  demand.  When  the  purchasing 
power  of  a  coin  becomes  25  per  cent  larger  than  its  bullion 
content,  would  men  be  induced  to  have  their  bullion  coined  ? 
They  would  be  under  precisely  the  same  inducement  as  if 
no  seigniorage  existed;  they  would  receive  from  the  mint 
coins  whose  purchasing  power  would  be  the  full  equivalent 
of  the  bullion  they  brought  to  the  mint. 

Let  us  change  the  assumption:  The  government  decides 
to  debase  the  coins  25  per  cent  (i.  e.,  have  them  contain 
25  per  cent  less  gold),  and  to  hoard  the  25  per  cent  seignior- 
age. This  would,  of  course,  cause  no  increase  in  the  rate 
of  coinage.  A  light-weight  coin  would  now  cost  the  same 
that  a  full-weight  coin  had  cost  before  the  seigniorage 
charge,  and  since  the  charge  would  not  cause  an  increase 
in  the  number  of  coins,  there  could,  under  this  assumption, 
be  no  rise  in  prices. 

Would  prices  fall  ?  This  would  happen  only  in  case  the 
light-weight  became  more  valuable  than  the  full-weight 
coins,  and  they  could  become  more  valuable  only  by  a 
diminution  in  the  number  of  coins  struck.  And  since  men 
would  give  no  more  bullion  for  a  light-weight  coin,  and 
since  it  would  buy  as  much  as  a  full-weight  coin  (for  we 
have  seen  that  prices  could  not  rise),  the  rate  of  coinage 
would  not  be  diminished. 


212  Introduction  to  Economics 

Let  us  suppose  that  after  accumulating  a  large  fund  of 
seigniorage  the  government  adopts  the  policy  of  coining 
its  fund  of  seigniorage,  and  thus  adding  largely  to  the 
supply  of  money  in  circulation.  How  will  this  affect  the 
purchasing  power  of  money?  So  long  as  this  25  per  cent 
seigniorage  was  hoarded  it  had  no  more  effect  on  prices  or 
(what  is  the  same)  on  the  purchasing  power  of  money 
than  if  it  were  non-existent.  But  the  very  moment  this 
large  additional  sum  of  money  enters  into  circulation,  the 
supply  of  money  relative  to  the  demand  for  it  is  increased, 
so  the  purchasing  power  of  coins  will  diminish;  in  other 
words,  prices  will  rise.  Demand  remaining  the  same,  so 
long  as  the  quantity  of  money  is  limited,  a  debased  coin 
will  circulate  not  according  to  the  amount  of  the  metal 
actually  contained,  but  at  the  purchasing  power  it  should 
bear,  were  it  of  full  weight  and  fineness.  Depreciation  of 
money  (rise  in  prices)  can  result  only  from  an  excess  of  it. 

It  has  been  said  that  prices  would  rise  (the  purchasing 
power  of  money  would  decline)  at  the  time  when  this  large 
additional  volume  of  money  enters  the  market.  Let  us 
now  consider  the  permanency  of  this  decline.  We  have 
assumed  that  men  have  been  bringing  100  grains  of  gold 
to  the  mint  in  exchange  for  coins  which  (though  they  con- 
tain 75  grains)  are  worth  the  full  100  grains.  If  coins  are 
now  worth  less  than  100  grains  of  gold,  it  will  be  evident 
that  bullion-owners  will  no  longer  give  100  grains  for  coins 
worth  less  than  100  grains.  After  this  extra  supply  of 
coins  has  been  absorbed  in  the  market,  there  will  be  little 
or  no  gold  offered  to  the  mint  for  coinage.  As  the  mone- 
tary demand  of  the  community  grows,  prices  will  decline 
(the  purchasing  power  of  money  will  rise).  This  will  con- 
tinue until  the  money  unit  reaches  a  purchasing  power 


Money  and  Its  Purchasing  Power        213 

equivalent  to  that  of  ioo  grains  of  gold,  when  the  bullion- 
owners  will  again  offer  their  gold  to  the  mint. 

15.  Seigniorage  in  the  Monetary  System  of  the  United 
States. — The  following  table  will  show  the  main  features 
of  our  monetary  system.  Gold  is  the  only  kind  of  money 
which  is  not  artificially  limited  in  amount;  it  is  the  only 
metal  subject  to  free,  unlimited,  and  gratuitous  coinage. 
Minor  coins  are  issued  only  in  exchange  for  other  money; 
men  get  change  from  the  bank,  and  the  bank  obtains  it 
from  the  government  mints.  Small  coins  are  redeemed 
on  demand  at  the  treasury  and  at  the  banks.  Their  con- 
vertibility maintains  their  parity.  As  the  following  table 
will  show,  the  bullion  content  of  these  coins  is  small. 

The  variety  of  uses  for  money  necessitates  a  number  of 
different  denominations,  there  being  an  elastic  limit  to  the 
amount  needed  in  the  different  denominations.  If  there 
be  a  shortage  of  dimes,  traders  would  be  glad  of  the  privi- 
lege of  exchanging  other  money  for  dimes;  if  too  many 
dimes,  traders  will  be  anxious  to  exchange  dimes  for  the 
more  needed  denominations.  Relative  to  all  forms  of 
money,  there  is  a  point  of  greatest  convenience  for  any 
one  denomination,  and  this  point  is  called  the  saturation- 
point.  This  point  marks  the  upper  limit  to  the  supply  of 
any  denomination.  The  dime,  for  example,  is  convertible 
into  other  forms  of  money,  and  when  too  many  dimes  get 
into  circulation  they  will  be  offered  for  redemption.  But 
while  the  bullion  content  of  the  dime  (silver  subsidiary: 
gold  ::  14.958  :  1)  is  small,  the  government  issues  it  at  face 
value,  thus  making  a  profit.  It  is  therefore  to  the  interest 
of  the  government  that  these  coins  remain  in  circulation. 
The  government  maintains  their  circulation  by  using  its 
monopoly  power  over  coinage  to  limit  their  output. 


214 


Introduction  to  Economics 


16.  Monetary  System  of  the  United  States, 

1915. 

Metals 

Weight,  grains 

Fineness 

Ratio  to  gold 

i.  Gold  coins 

258 

.90 

100 

2.  Silver  dollar 

412. S 

.90 

15.988  to  1 

3.  Silver,  subsidiary 

385.8 

.90 

14.953  to  1 

4.  Nickel  (5  cents) 

5.  Copper  (1  cent) 

77.0 

•25 

48.0 

•  95 

Metal 

Limit  of  issue 

Legal  tender  for  private 
debts 

Receivable  for 
public  dues 

1.  Gold  coins 

Unlimited 

Unlimited 

For  all 

2.  Silver  dollar 

Ceased  in  1905 

Unlimited 

For  all 

3.  Silver,  subsidiary 

Needs  of  the  people 

$10 

$10 

4.  Nickel  (5  cents) 

Needs  of  the  people 

25  cents 

25  cents 

5.  Copper  (1  cent) 

Needs  of  the  people 

25  cents 

25  cents 

Paper 

6.  Gold  certificates 

Unlimited  in  exch. 
for  gold  coin 

No 

For  all 

7.  Silver  certificates 

In     exchange     for 
silver  dollars 

No 

For  all 

8.  U.  S.  notes 

No  new  issues 

Unlimited 

Except  customs 

0.  Treas.notesof  1890 

No  new  issues 

Unlimited 

For  all 

10.  National  b'k  notes 

Capital  of  banks 

No 

Except  customs 

11.  Fed.  Reserve  notes 

Per  cent  of  gold  re- 
serve 

At  banks  of  res.  system 

For  all 

Metal 

Exchangeable  at 

Redeemable  at  Treasury 

In  circulation 

Treasury  for 

in 

Oct.  1,  1915 

1.  Gold  coins 

Gold  cert.  U.S.,Tr. 
or  Fed.Res.  notes 

616,000,000 

2.  Silver  dollar 

Silver  certificates 

65,000,000 

3.  Silver,  subsidiary 

Minor  coins 

Lawful    money     (a),    in 
sums  or  multiples  of  $20 

162,000,000 

4.  Nickel 

Lawful    money     (a)    in, 

sums  or  multiples  of  $20 

62,000,000  (d) 

5.  Copper 

Lawful    money     (a),    in 

sums  or  multiples  of  $20 

Paper 

6.  Gold  certificates 

Subsidiary  and 
minor  coins 

Gold  coin 

1,172,000,000  (e) 

7.  Silver  certificates 

Silver   and   minor 
coins 

Silver  dollars 

482,000,000  (/) 

8.  U.  S.  notes 

Subsidiary  and 
minor  coins 

Gold 

337,000,000 

9.  Treasury  notes  of 

Silver  and  minor 

Gold 

2,200,000 

1890 

coins 

10.  National  bank 

Subsidiary  silver 

Lawful  money  (b) 

761,000,000 

notes 

and  minor  coins 

11.  Fed.  Reserve  notes 

Gold  (c) 

Gold  (c) 

133,000,000 

Total  Qr) 

3,792,200,000 

(a)  "Lawful  money"  includes  gold  coin,  silver  dollars,  U.  S.  notes,  and  Treasury  notes. 
(6)   Redeemable  also  in  lawful  money  at  bank  of  issue. 

(c)  Redeemable  also  at  Federal  Reserve  banks  in  gold. 

(d)  Not  usually  included  in  the  estimates  of  total  money  in  circulation. 

(e)  Represented  dollar  for  dollar  by  gold  kept  in  the  U.  S.  Treasury. 

(f)  Represented  dollar  for  dollar  by  silver  kept  in  the  U.  S.  Treasury. 

(g)  Besides,  there  were  about  $312,000,000  in  the  U.  S.  Treasury  not  offset  by  outstand- 
ing paper.  The  total  money  stock  fin  circulation  and  in  the  Treasury,  eliminating  certifi- 
cates representing  gold  and  silver)  was  about  $4,233,000,000,  of  which  70  per  cent  was  metal 
(largely  represented  in  circulation  by  paper  certificates)  and  30  per  cent  "was  paper.  Of  the 
70  per  cent  50  was  gold,  18  was  silver,  and  2  was  copper  and  nickel. 

The  foregoing  table  is  taken  from  Fetter's  Modern  Economic  Problems,  vol.  II,  page  57. 


Money  and  IU  Purchasing  Power        215 

17.  The  Mint  Price  and  the  Market  Price  of  Gold  Bul- 
lion.— The  weight  of  a  gold  eagle  must  not  vary  more  than 
half  a  grain  from  the  standard  weight  prescribed  by  law. 
Smaller  gold  coins  must  vary  not  over  one-fourth  of  a 
grain.  This  allowable  variation  is  called  the  "tolerance 
of  the  mint."  The  American  gold  dollar  contains,  allow- 
ing for  the  tolerance  of  the  mint,  23.22  grains  of  fine  gold. 
In  the  United  States  23.22  grains  of  fine  gold  is  worth  as 
much  in  the  form  of  bullion  as  in  the  form  of  a  coin.  Why 
is  this  so?  The  answer  is  that  we  have  free,  unlimited, 
and  gratuitous  coinage  of  gold.  The  owner  enjoys  the 
privilege  of  offering  his  gold  bullion  to  the  mint  in  exchange 
for  gold  coin.  There  is  no  limit  to  the  amount  that  he  may 
so  offer,  and  no  seigniorage  is  charged  him;  he  gets  as 
much  metal  in  the  form  of  coin  as  he  offers  in  the  form  of 
bullion.  A  dollar  could  be  worth  neither  more  nor  less 
than  23.22  grains  of  gold,  because  the  mint  stands  ready 
at  all  times  to  give  gold  coins  for  the  amount  of  bullion 
they  contain. 

Furthermore,  the  market  price  (the  price  of  gold  bullion 
in  the  open  market)  cannot  vary  from  the  mint  price  (the 
amount  of  money  which  a  given  weight  of  gold  will  pro- 
duce when  coined)  of  gold  bullion.  Before  the  bullion- 
owner  are  two  competing  markets,  the  arts  market  and 
the  money  market.  On  the  one  side  stand  the  manufac- 
turers of  jewelry  and  other  articles  made  of  gold,  these 
manufacturers  being  the  middlemen  through  whom  are 
expressed  the  demands  of  all  purchasers  of  gold  products. 
On  the  other  hand  stands  the  mint,  likewise  an  interme- 
diary institution  through  which  are  expressed  the  demands 
of  the  whole  people  who  are  offering  their  goods  in  exchange 
for  money.     To  which  market  will  the  owner  sell  his  bul- 


216  Introduction  to  Economics 

lion?  The  answer  is  a  simple  one;  to  the  one  offering  the 
higher  price.  Let  us  assume  for  the  sake  of  illustration 
that  the  arts  market  offers  a  slightly  higher  price.  Gold 
bullion  would  drift  from  the  money  market  to  the  arts 
market.  This  would  limit  the  output  of  money,  thus 
causing  its  purchasing  power  to  rise;  relatively  speaking, 
it  would  enlarge  the  gold  supply  in  the  arts  market,  thus 
causing  its  money  price  to  decline.  The  change  of  de- 
mands in  the  two  markets  would  now  cause  gold  to  drift 
in  the  opposite  direction — from  the  arts  to  the  money 
market.  The  precious  metals  are  very  sensitive,  very 
responsive  to  even  slight  variations  in  demand — so  much 
so,  indeed,  that  virtually  no  difference  exists  in  the  price 
of  gold  as  between  the  two  markets. 

Now  that  gold  coined  and  gold  uncoined  are  worth  the 
same,  we  may  say  that  there  can  be  no  change  in  the 
money  price  of  gold.  A  dollar,  regardless  of  changes  in 
the  prices  of  all  other  commodities,  will  always  exchange 
for  23.22  grains  of  fine  gold,  no  more  and  no  less.  Gold 
is  the  primary  money  of  the  United  States;  all  other  forms 
of  our  money  are  automatically  regulated  by  the  purchas- 
ing power  of  gold. 

18.  Convertibility  of  Money. — Any  one  kind  of  money 
is  convertible  when  it  is  capable  of  being  exchanged  for  or 
redeemed  in  another  kind  of  money.  In  a  broader  sense 
we  may  speak  of  the  convertibility  of  any  good  into  money; 
land  is  convertible  into  money  and  money  into  land.  Con- 
vertibility is  used  generally  to  exchange  other  forms  of 
money  for  primary  money.  Convertibility  may  be  either 
implied,  as  in  case  of  our  silver,  or  it  may  be  and  usually 
is  expressed.  It  is  expressed,  for  example,  on  a  $10  gold 
certificate  in  these  words:  "This  certifies  that  there  have 


Money  and  Its  Purchasing  Power        217 

been  deposited  in  the  Treasury  of  the  United  States  of 
America  ten  dollars  in  gold  coin,  payable  to  the  bearer  on 
demand." 

The  purchasing  power  of  fiduciary  money  will  be  main- 
tained by  the  primary  money,  even  though  it  should  have 
little  or  no  bullion  content  when  a  large  amount  of  it  is  in 
circulation.  It  is  conceivable  that  ioo  pennies  might  be 
made  worth  more  than  a  one-dollar  piece.  They  perform  a 
very  necessary  function  in  our  petty  transactions  and  were 
their  supply  narrowly  limited,  they  would  surely  rise  in 
purchasing  power.  After  1893  British  India  restricted  the 
coinage  of  their  rupee,  and  the  monetary  demand  of  the 
community  grew  until  the  money  worth  of  the  rupee  sur- 
passed its  bullion  worth.  When  the  rupee  reached  i6d., 
for  instance,  it  would  have  produced  no  effect  for  the  gov- 
ernment to  offer  to  redeem  it  at  i5d.  in  gold.  This  reason- 
ing leads  to  this  conclusion:  Convertibility  determines  a 
limit  below  which  the  purchasing  power  of  fiduciary  money 
cannot  fall,  but  it  can  go  above  that  limit. 

This  conclusion  suggests  another  important  considera- 
tion: If  under  our  system  the  purchasing  power  of  a 
fiduciary  dollar  cannot  go  below  (under  certain  conditions 
might  even  go  above)  the  gold  dollar,  does  it  follow  that  a 
large  issue  of  fiduciary  money  would  have  no  bearing  on 
the  purchasing  power  of  a  dollar?  This  does  not  follow. 
Every  additional  dollar  thrown  into  circulation  has  the 
effect  of  lowering  the  purchasing  power  of  every  other  dol- 
lar. If  for  every  dollar  of  fiduciary  money  we  add  to  our 
circulating  media  we  should  withdraw  a  gold  dollar  from 
circulation,  placing  it  in  the  treasury  to  redeem  the  fidu- 
ciary, there  could  be  no  change  in  prices  (the  purchasing 
power  of  the  dollar  would  remain  the  same).     Prices,  the 


218  Introduction  to  Economics 

demand  for  money  remaining  the  same,  could  not.  change, 
because  there  would  be  no  alteration  in  the  supply  of 
money.  But  we  do  not  deposit  gold,  dollar  for  dollar,  back 
of  all  the  circulating  media.  Long  experience  has  demon- 
strated that  there  is  need  for  a  gold  redemption  fund  which 
is  small  in  comparison  with  the  total  circulating  media.  t 
It  is  rare  that  some  forms  of  fiduciary  money  are  offered 
for  redemption.  This  fact  leads  to  the  conclusion  that  a 
large  issue  of  fiduciary  money  adds  to  the  supply  of  money, 
and,  therefore,  the  demand  for  money  remaining  the  same, 
the  purchasing  power  of  a  dollar  will  decline  (prices  will 
rise) . 

19.  Exercises. — 1.  If  there  were  no  exchanges  would 
there  be  any  money  ?  If  there  were  no  money  would  there 
be  any  exchanges?  State  the  causal  sequence  between  the 
following:  large  production,  money,  minute  division  of 
labor,  exchange,  price. 

2.  Tobacco  is  not  money.  Why?  Tobacco  would  be 
money  under  certain  conditions.  What  are  the  condi- 
tions? What  is  meant  by  "that  which  does  the  money- 
work  is  the  money-thing"? 

3.  What  is  meant  by  "legal  tender "  ?  Could  a  commod- 
ity serve  as  money  which  is  not  legal  tender?  Give  an 
example  to  prove  your  answer. 

4.  What  is  the  primary  function  of  money?  Mention 
five  other  functions  which  are  derivative  from  this? 

5.  Are  the  following  synonyms:  money,  currency,  cash? 

6.  What  are  the  qualities  of  good  money?  Would  the 
qualities  of  money  which  is  good  for  a  poor  society  accus- 
tomed to  petty  transactions,  be  the  same  as  those  of  good 
money  for  a  wealthy  society  in  which  there  are  large 
monetary  transactions  ? 

7.  In  many  markets  the  laws  require  that  the  exact 
quality  and  weight  of  goods  be  stamped  upon  the  con- 
tainer; coinage  laws  require  that  metal  be  stamped,  thus 


Money  and  Its  Purchasing  Power        219 

certifying  its  weight  and  fineness.     The  objects  of  the  law 
in  the  two  cases  are  not  precisely  the  same.     Explain. 

8.  In  the  United  States  we  have  the  free,  .  .  .,  and  .  .  . 
coinage  of  gold.  Fill  in  the  blank  spaces  and  define  the 
terms  used. 

9.  This  chapter  states  that  money  would  not  depreciate 
in  purchasing  power  under  certain  conditions,  even  though 
100  per  cent  seigniorage  were  taken  out.  Is  this  true,  and 
if  so,  under  what  conditions? 

10.  The  mint  price  and  the  market  price  of  gold  tend 
to  remain  the  same  in  the  United  States.     Tell  why. 

11.  Nations  as  men  are  wealthy  in  proportion  to  the 
amount  of  money  possessed.     Criticise. 

12.  Assume  that  a  gold-mine  in  California  is  owned  by 
citizens  in  the  same  community.  Would  there  be  any  dif- 
ference in  the  increased  wealth  of  that  community  whether 
$10,000  worth  of  gold  were  mined  or  $10,000  worth  of 
wheat  were  produced?  Would  there  be  any  difference  in 
the  total  wealth  of  society  as  a  whole  ? 


CHAPTER  XI 

MONEY  AND  ITS  PURCHASING  POWER 

(continued) 

i.  Can  the  government  make  money?  2.  A  conservative  view  of  fiat 
money.  3.  Greenbacks  and  prices.  4.  Fiat  money  a  monopoly.  5.  Mar- 
ginal desirability  and  value:  a  restatement.     6.  The  marginal  use  of  money. 

7.  It  is  the  exchange  function  only  that  imparts  desirability  to  money. 

8.  The  purchasing  power  of  money.  9.  Real  income  and  the  price  level. 
10.  Two  meanings  of  the  purchasing  power  of  money.  11.  Effect  of  in- 
creasing gold  production.  12.  The  quantity  theory  of  money.  13.  Mis- 
understandings answered.  14.  The  number  of  goods:  N.  15.  Price  move- 
ments not  uniform.  16.  The  price  level  determined  by  means  of  index 
numbers.  17.  Simple  index  numbers.  18.  Weighted  index  numbers.  19. 
The  purposes  of  index  numbers.     20.   Exercises. 

i.  Can  the  Government  Make  Money? — The  beginner 
in  economics  believes,  and  will  state  without  fear  of  con- 
tradiction, that  not  only  can  the  government  make  money 
by  law,  but  also  that  it  does  actually  do  so.  He  believes 
that  it  is  in  the  prerogative  of  the  all-powerful  sovereignty 
of  the  state  to  declare  what  is  and  what  is  not  money.  That 
the  government  makes  money  seems  to  be  a  truism;  no 
statement  is  more  likely  to  command  universal  assent 
among  the  uninformed,  for  they  see  about  them  different 
kinds  of  money,  some  pieces  made  of  gold  but  many  more 
made  of  paper,  and  all  possessing  the  same  purchasing 
power.  And  the  uninformed  think  this  is  because  all  bear 
alike  the  government  stamp. 

But  after  a  study  of  the  question  the  student  will  realize 
that  it  is  in  a  very  limited  sense  that  the  government 

makes  money;  that  in  a  broader  sense  the  government  can 

220 


Money  and  Its  Purchasing  Power        221 

no  more  make  money  by  law  than  it  can  make  grape-juice 
by  law.  The  government  prescribes  the  conditions  under 
which  money  may  be  issued,  and  here  its  powers  end. 
The  government  can  make  money  only  in  the  sense  of 
making  itself  a  servant  of  the  laws  of  money.  Public  offi- 
cials must  understand  the  principles  of  money  and  define, 
subject  to  these  principles,  the  conditions  which  regulate 
the  issue  of  money. 

Suppose  that  the  government  could  arbitrarily  make 
money  by  law,  that  it  could  place  its  stamp  upon  bits  of 
paper,  and  that  these  bits  of  paper,  inscribed  "This  is  a 
dollar,"  would  pass  current  in  exchange  for  the  products 
of  the  world.  There  would  be  no  reason  why  Montenegro 
might  not  establish  a  government  press  and  print  enough 
paper  money  over  a  week's  end  to  buy  such  an  abundance 
of  goods  as  would  make  it  as  wealthy  as  the  United  States. 
A  political  speaker  said,  with  reference  to  the  American 
silver  dollar:  "If  the  government  can  make  a  dollar  with 
48  cents'  worth  of  silver  and  52  cents'  worth  of  law,  why 
should  a  poor  man  be  compelled  to  pay  $10  in  hard-earned 
money  as  taxes?  Put  100  cents'  worth  of  law  in  a  dollar, 
print  a  note  and  give  the  tax-payer  a  rest." 

The  above  are  the  ideas  of  extreme  fiat  theorists  who 
preach  the  doctrine  of  the  unlimited  power  of  the  state  to 
make  money  and  maintain  its  purchasing  power.  Fiat 
means"  let  there  be  made,"  and  extreme  fiat  theorists  believe 
that  the  government  in  its  magic  power  has  but  to  say 
"let  there  be  made  money"  in  order  to  convert  stones,  bark, 
paper,  or  anything  else  into  money.  The  chief  example 
of  fiat  theorists  in  the  United  States  were  the  "Green- 
backers"  who  wished  to  retain  and  to  increase  the  green- 
backs issued  during  the  Civil  War.     Many  of  them  saw 


222  Introduction  to  Economics 

in  greenbacks  an  exhaustless  source  of  national  income,  a 
ready  means  of  paying  the  national  debt,  a  liberation  from 
the  burdens  of  taxation,  and  better  yet,  a  source  from 
which  citizens  might  borrow  at  will  money  without  inter- 
est. Irredeemable  government  paper  and  luxury  for  all 
was  their  dream. 

2.  A  Conservative  View  of  Fiat  Money. — Fiat  money 
has  no  promissory  relationship  to  other  money.  The  gov- 
ernment definitely  promises  to  redeem  certain  forms  of 
money  in  gold  coin,  and  because  of  this  promissory  rela- 
tionship this  money  cannot  be  depreciated  below  the  pur- 
chasing power  of  gold  coin.  Fiat  money  need  suffer  no 
depreciation;  on  the  contrary,  it  may  be  made  to  appre- 
ciate, but  from  an  entirely  different  reason  from  that  of  a 
promissory  relationship.  Its  purchasing  power,  whatever 
that  may  be — low,  medium,  or  high — depends  upon  the 
degree  to  which  it  is  artificially  limited  and  the  demand 
made  for  its  use.  If  its  output  is  wisely  restricted,  if  con- 
fidence be  maintained  in  the  integrity  of  the  government 
issuing  it,  it  will  serve  all  the  functions  of  money;  through 
its  use  as  a  medium  of  exchange  it  becomes  the  standard 
of  price,  the  basis  of  credit,  and  the  standard  of  deferred 
payments. 

Those  writers  are  in  error  who  claim  that  money  always 
derives  its  purchasing  power  from  the  metal  constituting 
it.  Any  cause  limiting  the  supply  of  money  relative  to 
the  demand  for  it  is  as  efficient  a  cause  of  its  purchasing 
power  as  is  the  metal  constituting  it.  Gold  coin  may  be 
fiat  money,  and  is  fiat  when  the  money  worth  of  the  coin 
exceeds  its  bullion  worth,  due  to  the  artificial  limitation  of 
its  supply.  Then,  why  squander  the  precious  metals  in 
making  money  ? 


Money  and  Its  Purchasing  Power        223 

There  is  a  sound  reason  why  every  civilized  nation 
makes  use  of  the  precious  metals  in  its  monetary  system. 
The  precious  metals  have  been  produced  from  antiquity  to 
the  present;  they  are  so  precious  and  durable  that  they 
have  been  saved,  and  they  exist  in  great  abundance.  Cur- 
rent losses  from  them  or  additions  to  them  from  the  mines 
make  relatively  little  difference  in  their  total  supply;  they, 
therefore,  maintain  a  relatively  stable,  definite  purchasing 
power.  Note  that  the  word  was  stable,  not  fixed  purchas- 
ing power.  Stable  implies  relativity;  that  which  is  stable 
is  so  by  comparison  with  that  which  is  of  less  duration. 
Money  made  of  the  precious  metals  cannot  have  a  lower 
pui  chasing  power  than  that  of  the  bullion  content.  The 
supply  of  such  money  under  free,  gratuitous,  and  unlimited 
coinage  is  automatically  regulated  by  the  market  price  of 
the  bullion  constituting  it,  whereas  money  containing  no 
bullion  is  left  to  law,  to  the  miscalculations  and  changing 
opinions  of  lawmakers.  There  can  be  no  business  stability 
when  there  is  a  lack  of  public  confidence  in  the  money 
system. 

3.  Greenbacks  and  Prices. — In  1861  gold  was  the  money 
in  common  use  throughout  the  country.  In  that  year  the 
secretary  of  the  treasury  negotiated  with  the  banks  of 
New  York  City  a  loan  of  $150,000,000.  The  brilliant  suc- 
cesses of  the  South  on  the  field  of  battle,  together  with 
financial  incapacity  at  Washington,  weakened  Northern 
credit  and  rendered  these  bonds  all  but  unsalable.  De- 
positors, becoming  alarmed,  withdrew  gold  from  the  New 
York  banks,  and  forced  them  to  suspend  specie  payments. 
Other  banks  throughout  the  country  (excepting  banks  in 
California)  followed  the  New  York  banks  in  the  suspension 
of  specie  payments.  Bank-notes  became  the  money  of  the 
country. 


224  Introduction  to  Economics 

The  government  could  not  get  gold,  and  this  gave  the 
fiat  theorists  their  opportunity,  of  which  they  did  not  fail 
to  take  advantage.  In  February,  1862,  the  first  green- 
back law  was  passed,  and  in  less  than  a  year's  time  $400,- 
000,000  of  United  States  notes  (called  greenbacks  because 
of  their  color)  were  issued.  The  government  promised  to 
redeem  these  notes  some  time  in  the  future,  but  set  no 
date  for  their  redemption.  They  were  legal  tender  and 
served  as  the  standard  money  of  the  North.  Public  con- 
fidence in  their  worth  was  shaken  by  the  large  and  fre- 
quent issue  of  these  notes,  and  they  declined  in  purchasing 
power  until  $1  in  gold  would  exchange  for  $2.50  in  green- 
backs. It  follows,  of  course,  that  there  was  a  correspond- 
ing rise  in  prices. 

But  this  increase  in  price  was  not  due  wholly  to  the 
great  supply  of  greenbacks.  Only  one-half  of  the  country 
demanded  greenbacks,  whereas  formerly  the  whole  nation 
used  gold;  this  meant  that  there  was  probably  a  decline  in 
the  demand  for  money.  The  lessened  demand  for  money 
caused  a  decline  in  its  purchasing  power,  and,  the  com- 
modity prices  of  goods  remaining  the  same,  money  prices 
increased.  The  Confederacy  issued  $500,000,000  in  notes, 
which  may  be  considered,  in  their  bearing  on  prices,  a  part 
of  the  money  supply  of  the  whole  country.  Lastly,  the 
government  issued  treasury  notes  to  the  extent  of  $400,- 
000,000.  These  were  largely  used  as  bank  reserves  and 
thus  became  a  basis  of  credit.  Since  credit  does  exactly 
the  same  work  as  money,  whatever  serves  to  increase  credit 
would  have  the  same  bearing  on  prices  as  an  increase  in 
the  supply  of  money. 

When  greenbacks  were  issued,  they  were  from  the  be- 
ginning worth  less  than  gold.     In  this  way  debtors  profited, 


Money  and  Its  Purchasing  Power        225 

because  they  could  pay  their  debts  in  cheap  money,  could 
pay  to  creditors  less  purchasing  power  than  they  had 
received.  The  largest  single  class  of  debtors  were  the 
bankers,  who  were  forced  to  take  these  legal-tender  notes 
in  payment  of  loans,  and  so  were  forced  to  pay  them  out 
to  depositors;  thus  greenbacks  quickly  reached  every 
channel  of  commerce.  The  greenback  displaced  at  once 
the  old  standard  and  became  itself  the  new  standard  of 
prices.  Upon  becoming  the  standard  of  prices  it  must 
be  the  basis  of  credit,  because  promissory  notes,  checks, 
book  credit,  and  other  obligations  were  cancelled  by  the 
payment  of  greenbacks.  The  greenbacks  became  the  ob- 
ject of  the  country's  monetary  demand;  they  came  to  have 
a  purchasing  power  independent  of  the  old  standard;  as 
this  purchasing  power  was  less  than  that  of  the  former 
standard  money,  prices  (the  amount  of  money  in  green- 
backs) would  rise.  When  $i  gold  exchanged  for  $2.50 
greenbacks,  the  farmer  cared  not  at  all  whether  he  sold  a 
bushel  of  potatoes  for  a  price  of  $1  in  gold  or  for  a  price 
of  $2.50  in  greenbacks;  depreciated  money  and  high  prices 
are  convertible  terms. 

4.  Fiat  Money  a  Monopoly. — The  whole  charge  for  fiat 
money  may  be  considered  as  seigniorage,  seigniorage  being 
the  monopoly  price  which  the  government  charges  for  the 
issue  of  fiat  money.  In  the  case  of  a  fiat  issue,  the  govern- 
ment has  complete  monopoly  power,  but  the  government, 
as  in  the  case  of  any  other  monopolist,  can  control  the 
supply  only;  no  monopoly  has  power  to  dictate  what  the 
demand  shall  be.  The  expression  of  the  needs  of  the  peo- 
ple for  money  is  the  demand  for  money;  it  is  the  amount 
of  money-work  to  be  done  in  the  community.  He  who 
fails  to  give  as  full  weight  to  the  demand  for  money  as  to 


226  Introduction  to  Economics 

the  supply  of  it  is  ignorant  of  the  purchasing  power  of 
money  and  wholly  unfit  to  discuss  the  subject.  The  pur- 
chasing power  of  money  will  not  be  altered,  will  move 
neither  up  nor  down,  unless  the  government  alters  the 
quantity  of  money,  so  long  as  the  demand  remains  un- 
changed. It  makes  not  a  feather's  weight  of  difference 
whether  the  government  takes  out  i  per  cent  of  seigniorage 
or  10  per  cent  or  ioo  per  cent. 

"But,"  objects  one,  "former  issues  of  such  paper  have 
depreciated;  history  repeats  itself."  This  objection  is  be- 
side the  point;  this  argument  is  not  in  behalf  of  a  fiat  sys- 
tem, its  purpose  is  to  point  out  the  principles  according 
to  which  the  purchasing  power  of  money  is  regulated. 
Nowhere  is  a  better  exemplification  of  these  principles 
found  than  in  the  history  of  fiat  issues.  Valuable  lessons 
are  gained  from  the  history  of  monetary  systems,  even 
when  the  results  are  wholly  negative.  History  may  reveal 
the  nature  of  monetary  principles  by  showing  the  condi- 
tions under  which  they  will  not  work.  Some  conspicuous 
depreciations  of  fiat  money  are  recorded  in  history,  and 
insight  into  the  causes  at  work  in  these  cases  acquaints  us 
with  monetary  principles  and  the  best  utilization  of  them. 
We  learn  how  to  do  by  learning  how  not  to  do. 

As  early  as  the  twelfth  century  China  had  a  pure  fiat 
money  cut  from  the  inner  bark  of  the  mulberry-tree.  It 
was  issued  by  the  sovereign  power  of  the  people  with  as 
much  solemnity  as  if  it  were  of  pure  gold;  it  was  strictly 
limited  in  accord  with  the  principle  of  monopoly  control; 
it  maintained  the  full  confidence  of  the  people ;  it  performed 
all  the  functions  of  money  and  was,  therefore,  money  in 
the  full  meaning  of  that  word.  In  the  thirteenth  century 
Persia  imitated   this   Chinese  money,   but  attempted   to 


Money  and  Its  Purchasing  Power        227 

enforce  artificially  its  circulation.  After  a  trial  of  three 
days  business  closed  down,  the  officials  were  massacred, 
and  the  money  disappeared.  The  Persian  money  had  been 
made  in  imitation  of  the  Chinese  piece;  why  was  one  a 
conspicuous  success  and  the  other  a  conspicuous  failure? 
China  adhered  to  the  principles  of  money  by  restricting 
its  issue  to  the  amount  of  money- work  to  be  done;  Persia 
attempted  to  prosper  by  law  and  to  enforce  artificially  the 
circulation  of  their  issue. 

During  the  French  Revolution,  the  authorities  issued 
"assignats,"  fiat  paper  money,  which  at  first  performed 
well  the  functions  of  money.  Seeing  these  favorable  re- 
sults the  authorities  were  encouraged  and  continued  the 
operation  of  the  printing-press  until  forty-five  thousand 
millions  of  francs  were  issued.  Failure,  due  to  overissue, 
was  the  result.  Continental  currency  in  the  United  States 
was  issued  in  such  volume  that  even  the  treasury  ceased 
to  keep  a  record  of  the  issue.  Failure,  due  to  overissue, 
was  the  result. 

5.  Marginal  Desirability  and  Value:  a  Restatement. — 
We  are  coming  now  to  a  statement  of  the  marginal  de- 
sirability of  the  alternative  uses  of  money,  and  prepara- 
tory to  that  statement  a  brief  review  of  the  general  princi- 
ple is  called  for.  For  a  fuller  discussion  of  the  principle  see 
the  chapter  on  "  Desire,  Desirability." 

Desirability  is  a  quality  of  goods  or  services  which  is 
calculated  or  fitted  to  excite  a  wish  to  possess.  It  varies 
with  persons,  goods,  places,  and  times. 

Diminishing  desirability  expresses  the  principle  that  as 
supply  increases  the  total  desirability  increases  at  a  dimin- 
ishing rate.  As  one  adds  unit  after  unit  to  his  supply  of 
a  good,  the  total  desirability  of  the  supply  will  increase, 


228  Introduction  to  Economics 

but  as  the  supply  is  enlarged,  as  unit  after  unit  is  added, 
each  portion  of  the  supply  will  have  less  and  less  gratifying 
power. 

Each  additional  unit  of  a  supply  causes  the  owner  to  be 
less  dependent  upon  each  and  every  preceding  unit.  And 
every  unit  maintains  an  equal  desirability  with  every  other 
unit  of  a  supply.  Should  one  add  orange  after  orange  until 
he  had  a  supply  of  twelve,  any  one  would  have  a  desirability 
equal  to  that  of  any  other. 

If  the  desirability  of  one  unit  is  equal  to  that  of  any 
other  in  the  supply,  can  the  total  desirability  of  the  supply 
be  obtained  by  multiplying  the  desirability  of  one  unit  by 
the  number  of  units  ?  Not  at  all.  If  a  Crusoe  had  twelve 
guns  he  could  not  utilize  so  many  and  would  be  willing  to 
throw  one  away;  its  desirability  would  be  zero,  but  it  does 
not  follow  that  (o  X  12  =0)  zero  would  be  the  desirability 
of  the  whole  supply.  How,  then,  can  we  measure  the  total 
desirability?  We  can  do  it  by  subtracting  unit  after  unit 
and  adding  the  desirabilities  of  the  different  units,  in  this 
way  obtaining  the  sum  of  all  the  desirabilities — the  differ- 
ence between  the  total  desirabilities  of  twelve  guns  and 
no  guns. 

The  tendency  is  for  supplies  of  different  commodities  to 
maintain  equal  marginal  desirabilities.  One  ceases  to  buy 
bread,  not  necessarily  because  he  would  have  no  more  of 
it,  but  because  the  money  he  would  spend  for  additional 
bread  will  gratify  a  more  intense  desire  if  spent  for  some 
more  highly  desired  commodity. 

The  dollar  cannot  be  a  common  measure  of  marginal 
desirability  as  between  persons,  because  it  does  not  itself 
reflect  the  same  desirability  for  all  persons. 

Valuation  is  the  price  appraisal  of  a  good  or  service;  it 


Money  and  Its  Purchasing  Power        229 

may  be  expressed  as  the  amount  of  a  thing  one  would  be 
willing  to  give  for  a  good  or  service.  Valuation  is,  there- 
fore, a  direct  outgrowth  of  the  comparison  of  the  marginal 
desirabilities  of  different  things. 

6.  The  marginal  use  of  money  differs  from  that  of  other 
goods  in  this  way;  the  services  of  other  goods  are  more 
narrowly  limited,  whereas  money  is  universally  exchange- 
able and  thus  capable  of  serving  all  desires.  The  marginal 
use  (it  of  itself  has  no  marginal  desirability)  thus  comes  to 
express  the  general  level  of  the  marginal  desirabilities  of 
goods.  Any  particular  good,  bread  for  example,  diminishes 
rapidly  in  per-unit  desirability  to  each  owner  with  addi- 
tional increments;  the  desire  for  money  diminishes  slowly 
with  additional  increments,  for  the  purchasing  power  of 
money  spreads  out  over  the  broad  area  of  goods  in  general. 
When  water  is  poured  into  a  hollow  pipe,  the  level  will  rise 
rapidly;  but  it  will  rise  slowly  when  poured  upon  a  broad 
surface.  Just  so  rapidly  will  desirability  decline  when  in- 
crements, say  bread,  are  applied  to  the  gratification  of  a 
particular  desire,  and  as  slowly  in  the  case  of  money,  which 
spreads  itself  out  to  gratify  all  desires.  When  a  good  is 
offered  for  a  dollar,  it  is  offered  in  competition  with  all 
other  goods,  because  a  dollar  is  readily  exchangeable  for 
all  other  goods. 

7.  It  is  the  Exchange  Function  Only  that  Imparts  Desir- 
ability to  Money. — The  rich  may  be  enslaved  by  their 
wealth,  they  may  have  more  than  they  can  advantageously 
expend,  but  the  poor  must  calculate  their  expenditures  with 
care,  must  weigh  this  necessity  against  that  in  order  to 
get  the  greatest  total  desirability.  It  is  simply  untrue 
that  the  dollar  is  a  common  measure  of  desirability  as 
between  the  rich  and  the  poor.     One  will  say  that  the  poor 


230  Introduction  to  Economics 

and  the  rich  pay  exactly  the  same  prices  in  the  market; 
bread  is  not  10  cents  a  loaf  to  the  man  worth  $10,000  and 
5  cents  to  the  man  worth  $5,000.  Both  may  be  marginal 
buyers  of  bread  at  the  same  market-price,  and  this,  it  is 
argued,  proves  that  a  piece  of  money  has  the  same  desir- 
ability for  the  two  classes.  In  fact,  no  such  thing  is  proved. 
The  desirability  reflected  by  a  piece  of  money  may  be 
ten,  or  twenty,  or  one  hundred  times  greater  to  the  poor 
than  to  the  rich,  yet  both  are  willing  to  pay  the  same  price 
for  a  loaf.  But,  suppose  that  both  are  marginal  buyers 
of  the  same  thing  at  the  same  price  (i.  e.,  neither  willing 
to  pay  a  penny  more),  how  account  for  the  fact  that  the 
desirability  reflected  by  money  is  higher  to  the  one  than 
to  the  other?  The  simple  truth  and  complete  reply  to 
this  question  may  be  stated  as  follows:  If  the  marginal 
desirability  of  a  unit  of  money  is  ten  times  greater  for  the 
poor,  and  if  the  marginal  desirability  of  the  loaf  is  like- 
wise ten  times  greater  for  the  poor  than  for  the  rich  man, 
both  must  be  marginal  buyers  at  precisely  the  same  price.1 

How  much  of  any  one  commodity  will  the  buyer,  rich 
or  poor,  take?  Each  and  every  individual  will  continue 
to  buy  until  the  point  is  reached  where  the  marginal  de- 
sirability of  that  commodity  comes  to  equal  the  marginal 
desirability  of  its  money  price.  If  oranges  are  5  cents 
each,  a  buyer  will  continue  to  buy  oranges  until  an  equality 
is  reached  between  the  marginal  desirabilities  of  something 
else  the  5  cents  will  buy  and  one  orange.  This  point  of 
equality  of  marginal  desirabilities  is  the  stopping-point  of 
the  purchaser. 

Let  us  answer  this  question:  What  determines  the  mar- 

'See  last  paragraph  in  chapter  on  "Desire,  Desirability."  Cf.  Daven- 
port's Economics  of  Enterprise,  ch.  VII. 


Money  and  Its  Purchasing  Power        231 

ginal  desirability  of  the  alternative  use  of  a  unit  of  money  ? 
Through  a  simple  exchange  the  purchasing  power  in  the 
form  of  a  coin  may  be  given  the  form  of  an  orange,  of  a 
loaf  of  bread,  or  of  any  other  thing  on  the  market.  Money 
serves  no  end  in  itself,  it  is  a  means  to  an  end,  and  its 
desirability  is  to  be  thought  of  in  terms  of  the  goods  for 
which  it  will  exchange.  Its  desirability  is  not  an  indepen- 
dent thing,  because  it  is  derived  from  that  for  which  it 
will  exchange.  For  what  quantity  of  other  commodities 
will  a  dollar  exchange  ?  The  amount  of  anything  for  which 
a  dollar  will  exchange  depends  upon  the  price  of  that 
thing;  and  the  concept  of  the  general  purchasing  power 
of  a  dollar  depends  wholly  upon  the  general  level  of  prices. 

To  state  the  argument  briefly:  The  importance  attrib- 
uted to  a  dollar  differs  among  persons;  the  purpose  of  the 
dollar  is  to  buy  things,  therefore  its  desirability  for  a  per- 
son is  the  desirability  of  a  dollar's  worth  of  goods  to  that 
person.  The  dollar's  worth  of  goods  depends  upon  the 
general  or  average  level  of  prices,  and  the  level  of  prices 
is  at  the  point  of  equality  of  ratio  between  money  and 
goods.  Marginal  buyers,  rich  and  poor,  pay  the  same 
level  of  prices  in  the  market,  not  because  they  have  the 
same  marginal  desirabilities,  but  because  they  have  an 
equality  of  ratio  as  between  the  money  and  the  goods 
bought. 

8.  The  Purchasing  Power  of  Money. — A  dollar  will 
buy  10  pounds  of  sugar  at  10  cents  a  pound,  20  pounds  at 
5  cents,  and  50  pounds  at  2  cents  a  pound.  It  is  but  a 
common  truism  that  the  purchasing  power  of  money  is 
large  when  prices  are  low,  and  small  when  prices  are  high. 
The  average  or  general  purchasing  power  of  money  de- 
pends upon  the  general  average  or  level  of  prices.     The 


232  Introduction  to  Economics 

words,  "depends  upon,"  in  the  last  sentence  do  not  ex- 
press the  exact  idea;  it  is  strictly  accurate  to  say  that 
"the  purchasing  power  of  money"  and  "the  general  level 
of  prices"  are  convertible  terms.  Neither  depends  upon 
the  other,  both  mean  one  and  the  same  thing. 

The  average  weight  of  a  baseball  nine  is  the  total  weight 
of  the  members  divided  by  nine.  No  member  may  weigh 
exactly  the  same  as  this  average.  The  weights  of  the  dif- 
ferent individuals  will  be  distributed  about  this  general 
average — some  below  and  some  above.  Likewise,  if  we 
compare  the  prices  of  particular  goods  with  the  general 
level  of  prices,  we  will  find  them  distributed  about  this 
general  average — some  above  and  some  below,  some  high 
and  some  low.  Professor  Irving  Fisher  aptly  compares 
the  level  of  prices  to  the  level  of  a  lake.  The  surface  of 
the  lake  is  not  smooth,  there  are  waves  and  for  every  wave 
a  trough.  Below  the  general  level  are  the  troughs,  and 
above  are  the  crests  of  the  waves.  The  individual  waves 
and  troughs  will  not  vary  far  from  the  general  level  of 
prices.  If  prices  are  low  the  purchasing  power  of  money 
is  high.  This  would  cause  each  person  to  be  anxious  for 
money  and  would  make  him  willing  to  sell  his  product  for 
a  low  money  price.  On  the  contrary,  if  the  purchasing 
power  of  money  is  low,  the  seller  will  require  more  money, 
a  higher  price  for  his  product.  The  prices  of  particular 
commodities  are  influenced  by  and  tend  to  vary  with  the 
general  level  of  prices. 

9.  Real  Income  and  the  Price  Level. — We  have  defined 
valuation  as  a  price  appraisal,  or  as  the  amount  of  one 
thing  which  an  individual  would  be  willing  to  give  for 
another  thing.  From  this  definition  it  is  clear  that  one's 
valuation  of  a  piece  of  money  is  the  amount  of  something 


Money  and  Its  Purchasing  Power        233 

else  which  he  would  be  willing  to  give  for  it.  Thus  the 
valuation  of  money  comes  to  be  expressed  in  terms  of  com- 
modities in  general,  and  so  we  can  express  one's  valuation 
of  money  in  terms  of  the  general  level  of  prices. 

The  level  of  prices  (the  purchasing  power  of  money)  de- 
termines for  the  individual  what  he  can  get  in  exchange 
for  a  unit  of  money.  The  various  classes  of  people,  such 
as  farmers,  laboring  men,  and  professional  men,  buy  those 
goods  which  are  suited  to  their  needs.  Engineers  do  not 
buy  plows  and  farmers  do  not  buy  dentists'  chairs.  The 
real  income  of  the  individual  depends  upon  his  money 
income  and  upon  the  prices  of  the  things  he  buys.  But 
the  prices  of  the  things  he  buys  depend  upon  the  gen- 
eral level  of  prices.  To  illustrate:  Will  the  housewife  pay 
90  cents  for  a  dozen  eggs?  Yes,  if  she  desires  the  eggs 
more  than  something  else  the  90  cents  would  buy.  She 
weighs  in  her  mind  the  eggs  against  the  alternative  use  of 
the  money.  If  the  level  of  prices  is  low  the  purchasing 
power  of  her  money  will  be  high;  she  will  highly  regard 
her  90  cents  and  so  will  pay  but  a  small  price  for  eggs. 
The  seUer  of  eggs  will  be  more  eager  for  the  money  be- 
cause of  its  high  purchasing  power,  and,  in  consequence, 
he  will  part  with  the  eggs  for  a  low  price.  Hence,  if  the 
price  level  is  low,  the  price  of  eggs  or  the  price  of  any  other 
particular  good,  will  be  low.  Because  individual  prices 
conform,  more  or  less  roughly,  to  the  general  price  level, 
one's  real  income — whatever  class  of  goods  he  buys — de- 
pends upon  his  money  income  and  the  level  of  prices. 
Some  modifications  of  this  statement  will  be  noted  under 
the  topic  "Price  Movements  Not  Uniform." 

10.  Two  Meanings  of  the  Purchasing  Power  of  Money. 
— Two  meanings  may  attach  to  the  expression,  "the  pur- 


234  Introduction  to  Economics 

chasing  power  of  money."  We  may  have  in  mind  either 
a  unit  of  money  or  the  total  supply  of  money  when  speak- 
ing of  the  purchasing  power  of  money.  In  this  discussion 
we  have  reference  to  the  purchasing  power  of  each  integral 
part  of  the  circulating  media,  for  to  speak  of  the  total  pur- 
chasing power  of  money  would  serve  no  practical  purpose. 
Moreover,  the  total  purchasing  power  of  money  is  neither 
increased  nor  diminished  by  adding  to  or  subtracting  from 
the  amount  of  money.  The  total  money-work  to  be  done 
determines  the  purchasing  power  of  the  amount  of  money 
used  to  do  that  work,  be  that  amount  large  or  small. 

If  an  isolated  society  requires  $100,000  to  carry  on  con- 
veniently its  money -work,  this  sum  would  perform  all  the 
functions  of  money,  would  transact  all  the  exchanges  re- 
quiring money;  it  would,  in  short,  supply  the  total  demand 
for  money.  Were  this  amount  doubled  no  additional 
money -work  could  be  done  and  no  additional  demand  sup- 
plied. Two  dollars  would  be  used  to  do  the  work  formerly 
done  by  one,  and  two  dollars  would  take  on  the  same  pur- 
chasing power  which  was  formerly  held  by  one.  This 
reasoning  holds  with  equal  force  for  the  entire  world. 

We  have  seen  that  the  total  price  of  a  large  crop  may  be 
smaller  than  that  of  a  small  one,  but,  as  above  pointed 
out,  the  same  reasoning  does  not  apply  to  the  total  pur- 
chasing power  of  the  quantity  of  money.  The  total  pur- 
chasing power  of  money,  be  it  remembered,  is  determined 
by  the  money-work  to  be  done,  and  this  work,  other  things 
being  equal,  is  not  altered  by  a  change  in  the  quantity  of 
money.  Again,  every  bushel  of  wheat  added,  even  though 
it  decrease  the  total  price  of  wheat,  is  an  increase  of  wealth, 
but  the  same  cannot  be  said  in  case  of  the  added  dollar. 
On  the  one  hand,  money  exchanges  against  all  commodi- 


Money  and  Its  Purchasing  Power        235 

ties;  on  the  other,  wheat  is  but  one  of  a  number  of  com- 
modities to  exchange  against  money.  If  a  large  supply 
causes  wheat  to  decline  in  price  as  compared  with  other 
commodities,  it  will  represent  a  less  portion  of  the  total 
demand  for  money,  and  its  price  will  fall  per  bushel  and 
in  sum.  But  the  total  supply  of  money,  on  its  side,  stands 
alone  in  the  demand  for  goods  and,  other  things  remaining 
the  same,  can  neither  rise  nor  fall  in  purchasing  power 

ii.  Effect  of  Increasing  Gold  Production. — Due  both  to 
the  discovery  of  new  fields  and  to  improved  methods,  there 
has  been  an  enormous  increase  in  the  output  of  gold  in  the 
last  few  years.  There  are  two  world  markets  for  gold ;  the 
arts  market  and  the  money  market.  It  has  large  value 
in  little  bulk,  is  durable,  and  is  universally  acceptable. 
These  qualities,  together  with  a  world  demand,  give  it  a 
world  market  at  a  virtually  uniform  world  price,  so  what- 
ever effect  there  may  be  from  an  increase  of  its  output,  it 
will  be  world-wide.  If  it  affects  prices,  not  one  nation  but 
all  nations  share  the  consequences. 

If  there  be  no  material  change  in  the  volume  of  business 
or  in  the  methods  of  trade,  an  enlarged  output  of  gold 
will  enlarge  the  supply  of  this  commodity  relative  to 
other  forms  of  wealth,  thus  lowering  the  valuation  of  a 
unit  of  it  in  terms  of  other  goods.  What  use  will  be  made 
of  this  increased  output?  It  will  be  used  in  the  industrial 
arts,  or  for  the  coinage  of  money,  or  for  both  of  these  pur- 
poses. If  at  first  the  arts  market  bids  higher  for  its  use, 
the  supply  of  money  will  not  be  increased,  while  many 
additional  articles,  made  partly  or  wholly  of  gold,  will  be 
thrown  upon  the  market.  The  money  price  of  these  goods 
will  decline,  and  this  will  cause  a  part  of  the  increase  to  be 
diverted  to  monetary  uses.     For  the  reasons  stated  in  the 


236  Introduction  to  Economics 

discussion  of  free,  unlimited,  and  gratuitous  coinage,  the 
bullion  value  of  gold  will  be  the  same  in  the  two  markets. 
A  portion  of  the  additional  output  of  gold  will  go  into  the 
arts  and  a  portion  will  be  converted  into  coin.  The  de- 
mand for  money  remaining  the  same,  there  will  be  a  tran- 
sition from  lower  to  higher  prices.  We  are  now  prepared 
to  summarize  our  discussion  with  a  statement  and  explana- 
tion of  the  economic  theory  accounting  for  these  price 
phenomena. 

12.  The  Quantity  Theory  of  Money.  —  Logically  the 
quantity  theory  should  have  been  discussed  near  the  be- 
ginning of  the  preceding  chapter,  because  it  embodies  the 
foundation  principle  of  all  reasoning  on  the  purchasing 
power  of  money.  But  I  have  tried  to  follow  a  more  peda- 
gogical order  of  topics  in  order  to  prepare  the  way  for  a 
clearer  insight  into  this  theory.  By  placing  it  here  it  will 
serve  as  a  review  in  part  of  principles  already  given  and 
these  in  turn  will  make  clear  the  quantity  principle. 

The  quantity  theory  of  money  may  be  formulated  as 
follows:  Other  things  remaining  equal,  the  purchasing 
power  of  a  unit  of  money  falls  as  the  quantity  of  money 
increases,  and  vice  versa.  To  express  this  differently: 
Prices  will  rise  and  fall  in  direct  proportion  to  changes  in 
the  quantity  of  money,  providing  other  things  do  not 
change.  What  do  we  mean  by  other  things?  They  are 
two:  the  rate  of  turnover  of  the  money  itself,  i.  e.,  the  aver- 
age number  of  times  a  year  a  dollar  is  exchanged  for  goods, 
and  the  number  of  goods  per  year  exchanged  for  money. 

The  supply  of  money  and  the  quantity  of  money  are 
different  concepts.  The  supply  of  money  includes  the 
quantity  of  it  and,  what  is  equally  important,  the  velocity 
of  its  circulation.     "The  nimble  sixpence  does  the  work  of 


Money  and  Its  Purchasing  Power        237 

the  slow  shilling."  A  dollar  that  turns  over  or  is  exchanged 
for  goods  five  times  a  day  does  as  much  money-work,  no 
less  and  no  more,  as  the  five-dollar  coin  or  paper  which 
turns  over  once  a  day.  Let  M  symbolize  the  amount  of 
money  and  R  its  rate  of  turnover,  then  M  (money)  multi- 
plied by  R  (rate  of  turnover)  gives  us  the  supply  of  money. 

Let  N  symbolize  the  goods  exchanged  for  money  and  P 
the  price  at  which  these  goods  are  exchanged.  Then  N 
multiplied  by  P  gives  us  the  demand  for  money.  The 
equation  of  exchange  algebraically  expressed:  MR  =  NP  or 

MR 
N 
In  order  that  P  may  be  increased  there  must  be  an  in- 
crease in  M,  or  in  R,  or  a  decrease  in  N.     On  the  other 
hand,  P  is  decreased  by  a  decrease  in  M,  or  in  R,  or  by  an 
increase  in  N.1 

13.  Misunderstandings  Answered. — Does  the  quantity 
theory  teach  that  if  the  amount  of  money  is  increased 
prices  will  increase?  It  teaches  nothing  of  the  kind. 
Writers  who  ought  to  know  better  have  erred  at  this  point. 
Suppose  that  M  (quantity  of  money)  is  doubled  and  that 
its  rate  of  turnover  (R)  is  reduced  from  twenty  to  ten  times 
a  year;  there  would  be  no  movement  in  price,  for,  in  the 
light  of  our  reasoning  above,  the  supply  of  money  (the 
product  of  M  and  R)  is  unaltered.  Suppose,  again,  that 
M  is  doubled,  that  R  is  unchanged,  and  that  N  doubles; 
here  again  there  would  be  no  price  movement. 

If  India  has  $3  per  capita  and  the  United  States  $45, 
does  it  follow  that  prices  will  be  fifteen  times  as  high  in  the 
latter  country?  This  would  have  to  be  answered  in  the 
affirmative,  if  money  in  both  countries  circulated  at  the 

xSee  Money  and  Prices,  by  E.  W.  Kemmerer  (2d  ed.,  1909),  pp.    \sjf . 


238  Introduction  to  Economics 

same  rate  and  if  the  amount  of  goods  exchanged  for  money 
were  the  same  per  capita.  But  in  India  money  circulates 
less  rapidly  and  the  number  of  goods  per  capita  exchanged 
for  money  is  less  than  in  the  United  States. 

What  effect  does  barter  have  upon  money  prices?  To 
the  extent  that  people  trade  by  barter  they  lessen  the 
demand  for  money.  If  N  is  diminished,  MR  remaining 
the  same,  P  must  increase. 

What  effect  does  the  use  of  checks  have  upon  prices? 
They  substitute  directly  for  money  and  thereby  lessen  the 
demand  for  it.  The  purchasing  power  of  money  declines 
and  prices  rise.  As  in  the  above  case  N  (the  number  of 
goods  exchanged  for  money)  declines,  and,  MR  remaining 
the  same,  P  rises. 

What  effect  does  hoarding  have  upon  money  prices? 
Hoarding  is  a  matter  of  degree,  for  exchanging  is  a  series  of 
hoarding.  Money  is  hoarded  except  at  the  instant  it  is 
doing  money-work.  Its  circulation  cannot  be  compared 
with  the  flowing  of  a  stream  through  the  channels  of  com- 
merce, it  could  more  aptly  be  compared,  as  some  one  has 
put  it,  with  the  jumping  of  a  rabbit.  It  jumps  and  rests  a 
while,  then  jumps  again,  and  so  on.  But  to  the  extent 
that  money  is  hoarded  it  diminishes  the  supply  of  money 
which  is  doing  the  money-work.  R  in  the  equation  cf  ex- 
change js  diminished,  that  is  to  say,  the  supply  of  money 
is  diminished;  .M  and  N  remaining  the  same,  P  must  di- 
minish. 

Does  an  increase  in  the  quantity  of  money  decrease  its 
rate  of  turnover  ?  History  shows  that  there  is  no  percepti- 
ble change  in  the  velocity  of  circulation  when  the  quantity 
of  money  is  increased.  In  case  of  the  discovery  of  a  gold- 
mine the  miners  at  first  convert  their  product  into  money, 


Money  and  Its  Purchasing  Power        239 

and  in  this  way  obtain  bags  of  surplus  money  above  their 
needs.  They  will  either  spend  it  for  goods  or  put  it  in 
the  bank.  If  large  amounts  of  surplus  money  suddenly 
come  into  the  market,  there  will  be  a  rush  upon  the  stores. 
The  demand  for  goods  relative  to  the  supply  will  push  the 
price  up.  If  this  surplus  finds  its  way  into  the  bank  it 
will  not  be  held  idle;  the  banks  will  find  a  means  of  forc- 
ing it  into  circulation.  Its  rate  of  circulation  will  not  be 
diminished  and  the  goods  exchanged  for  it  will  take  on  a 
higher  money  price. 

What  is  the  effect  of  book  credit  upon  the  rate  of  turnover 
and  therefore  upon  prices?  If  we  have  goods  "charged" 
we  need  keep  little  money  on  hand.  If  we  pay  at  the 
time  of  purchase  we  must  have  the  money  in  advance  of 
the  purchase.  In  the  first  case  we  may  have  no  money 
until  pay-day,  and  then  turn  it  over  to  our  creditors  all 
at  once.  In  the  second  case  we  pocket  our  wages  on  pay- 
day, and  pay  it  out  gradually.  The  first  throws  the  wages 
into  circulation  immediately;  the  second  has  the  effect  of 
hoarding  (holding  out  of  circulation)  on  the  average  at 
least  half  the  wages.  We  have  seen  that  hoarding  dimin- 
ishes the  supply  of  money  and,  other  things  equal,  lowers 
prices.  Again:  when  one  pays  as  he  goes,  he  usually  pays 
in  money  and  when  he  pays  at  the  end  of  the  week  or 
month  he  pays  by  check.  When  the  use  of  checks  substi- 
tutes for  that  of  money,  the  demand  for  money  is  lessened 
and  prices  rise.1 

14.  The  Number  of  Goods. — We  have  spoken  as  if  a 
good  exchanges  but  one  time  in  the  market  and,  there- 
fore, makes  but  one  demand  upon  the  money  supply.  In 
one   sense   this   is  literally   true.     But  the   student  may 

1  See  Fisher's  Economics,  pp.  242-247. 


240  Introduction  to  Economics 

take  an  example,  say,  of  a  hat  worth  about  $5,  to  show 
that  our  assumption  is  not  well  founded.  He  may  show 
that  it  is  sold  by  the  manufacturer  to  the  jobber  for  $4, 
by  the  jobber  to  wholesaler  for  $4.50,  by  wholesaler  to 
retailer  for  $5,  by  retailer  to  consumer  for  $6.  ($4  plus 
$4.50  plus  $5  plus  $6  equals  $19.50.)  This  would  show 
that  the  hat  makes  a  demand  of  $19.50  rather  than  a  de- 
mand of  $5  upon  the  supply  of  money. 

If  we  have  grasped  the  full  meaning  of  production,  how- 
ever, it  is  clear  that  the  hat  as  such  is  not  fully  produced 
until  it  is  in  the  consumer's  hands.  At  each  productive 
stage  it  holds  a  new  and  different  economic  relationship 
and  may  be  considered  as  a  different  economic  good  with 
respect  to  the  demand  it  makes  for  money.  In  any  one 
stage  it  exchanges  but  once  and  at  a  different  price  from 
that  of  any  other  stage.  How,  then,  is  the  number  of 
goods  counted  ?  The  number  of  goods  exchanging  against 
money  is  counted  by  the  number  of  exchanges  just  as  the 
number  of  passengers  on  a  railroad  is  counted  by  the  num- 
ber of  fares  collected.  The  Subway  in  New  York  City 
carries  about  1,500,000  passengers  a  day,  or  approximately 
547,500,000  a  year.  The  number  of  different  persons  car- 
ried would  be  but  a  small  fraction  of  the  number  of  pas- 
sengers. 

15.  Price  Movements  Not  Uniform. — At  any  one  time 
the  prices  of  certain  commodities  will  be  rising  and  the 
prices  of  others  will  be  declining.  But  when  speaking  in 
general  terms  of  price  movements  reference  is  made  to  the 
general  average  or  level  of  all  prices.  Some  objectors  to 
the  quantity  principle  argue  that  if  an  increase  of  money 
is  a  cause  of  rising  prices,  it  will  have  the  same  influence 
on  the  price  of  all  goods;  if  the  cause  is  general  its  effect 


Money  and  Its  Purchasing  Power        241 

will  be  general.  But  any  right-thinking  person  should 
know  that  if  the  worth  of  certain  goods  declines  more 
rapidly  than  does  the  purchasing  power  of  money  (i.  e.,  a 
rise  in  general  price  level)  these  goods  must  fall  in  price. 

Certain  goods  maintain  the  same  price,  even  with  large 
movements  in  the  purchasing  power  of  money.  Prices 
that  are  fixed  in  advance  by  contracts  cannot  change. 
Interest  or  the  price  paid  according  to  a  contract  for  the 
present  over  the  future  use  of  capital  will  not  change.  The 
price  of  gold  bullion  will  change  not  at  all,  and  the  price 
of  goods  made  of  gold  will  vary  little,  if  any,  when  there 
is  a  change  in  the  value  of  money.  Goods  sold  under  the 
principle  of  price  maintenance  will  not  vary.  Charges 
such  as  rates  and  fares  on  public  utilities,  and  other  prices 
subject  to  legal  restrictions  will  remain  the  same,  whether 
the  purchasing  power  of  money  varies  up  or  down. 

Monopoly  prices,  for  example,  steel  rails,  tend  to  main- 
tain a  uniform  price,  irrespective  of  the  general  price 
movement.  Articles  will  vary  little  in  price  which  fully 
substitute  for  other  goods  which  maintain  a  fixed  price.  If 
two  articles  directly  substitute  for  one  another  they  can 
differ  but  little  in  price,  for  if  one  becomes  cheaper  buyers 
make  little  market  demand  for  the  dearer,  thus  causing 
its  price  to  decline;  they  make  a  large  market  demand  for 
the  cheaper,  thus  causing  its  price  to  rise.  This  principle 
causes  substitutes  to  sell  at  about  the  same  price. 

Certain  goods  decline  in  price  at  the  same  time  that  the 
price  level  is  rising.  Perishable  food  products  decline  in 
price  at  those  times  of  the  year  when  the  market  is  full,  or 
approaching  a  glut,  and  this  despite  a  decline  in  the  pur- 
chasing power  of  money.  The  same  is  true  of  goods  pass- 
ing out  of  style.     New  processes  and  inventions  are  all  the 


242  Introduction  to  Economics 

while  sending  machinery  to  the  scrap-heap  in  some  cases, 
and  forcing  down  the  prices  of  machinery  in  other  cases. 

The  level  of  prices  could  not  rise  unless  the  total  increase 
of  prices  outweighed  the  total  decrease.  And  the  prices 
which  rise  do  not  go  up  uniformly.  For  instance,  the 
wages  of  labor  move  very  slowly.  Employers  fear  to  raise 
wages  because  it  is  difficult  to  lower  them  in  case  of  neces- 
sity, and  when  wages  are  high  laborers  fight  every  move 
to  lower  their  income.  Real  estate,  advertised  goods,  and 
others  move  very  slowly.  But  a  decline  in  the  purchasing 
power  of  money  means  that  average  prices  rise;  to  the  ex- 
tent that  some  prices  decline,  others  remain  stationary,  and 
others  rise  slowly,  the  prices  of  some  commodities  must 
rise  rapidly. 

1 6.  The  Price  Level  Determined  by  Means  of  Index 
Numbers. — As  above  pointed  out,  the  purchasing  power 
of  money  is  expressed  by  the  quantity  of  other  things  which 
a  unit  of  money  will  buy.  It  varies  inversely  as  the  gen- 
eral level  of  prices.  If  the  level  of  prices  is  high  a  given 
amount  of  goods  or  services  will  cost  a  large  amount  of 
money;  the  money  cost  of  these  would  be  low  if  the  price 
level  be  low.  It  would  be  an  easy  task  to  determine  the 
price  level  if  all  prices  moved  uniformly,  but  individual 
prices,  like  the  different  bees  in  a  swarm,  move  with  seem- 
ing independence  in  divers  directions,  though  the  general 
movement  be  upward  or  downward  when  taken  as  a  whole. 
The  different  movements  of  individual  prices  make  the 
determination  of  general  prices  extremely  difficult.  Gen- 
eral prices  are  determined  by  index  numbers. 

17.  Simple  Index  Numbers. — The  prices  of  a  large  num- 
ber of  commodities  are  determined  in  some  year,  and  these 
prices  are  called  100  as  a  basis  of  comparison.     If  in  the 


Money  and  Its  Purchasing  Power        243 

year  chosen,  say  1900,  the  price  of  salt  is  10  cents  a  pound, 
that  price  will  be  100  per  cent  of  itself.  Now,  in  order  to 
get  a  broad  range  of  prices,  take  the  prices  of,  say,  one 
hundred  different  commodities  so  selected  from  the  sev- 
eral fields  of  industry  as  to  represent  the  general  average 
of  the  purchasing  power  of  money.  As  in  the  case  of  salt, 
each  of  these  prices  will  be  100  per  cent  of  itself.  The 
index  number  for  all  these  commodities  will  be  10,000. 
This,  divided  by  the  number  of  commodities,  will  give  100 
as  an  average.  Suppose  at  the  end  of  the  following  year 
the  prices  of  the  same  commodities  be  again  determined, 
with  the  following  results:  ten  have  risen  50  per  cent,  ten 
have  risen  40  per  cent,  ten  have  risen  20  per  cent,  twenty 
have  risen  10  per  cent,  forty  have  remained  the  same,  ten 
have  diminished  20  per  cent.  By  adding  these  prices  we 
get  11,100  as  the  index  number  for  the  whole  group  for  the 
second  year.  This,  divided  by  the  number  of  commodi- 
ties (100),  will  give  in,  representing  a  rise  of  n  per  cent 
in  the  general  level  of  prices.  This  method  of  simple 
index  numbers  is  obviously  deficient  in  one  particular. 
Our  next  method  will  take  account  of  this  shortcoming. 

18.  Weighted  Index  Numbers. — Some  commodities  make 
far  heavier  demands  upon  money  than  others.  The  amount 
of  indigo  sold  is  insignificant  in  comparison  with  the  vol- 
ume of  wheat  sold.  If  the  price  of  indigo  drops  50  per 
cent,  and  that  of  wheat  increases  10  per  cent,  would  it  be 
fair  to  state  that  the  cost  of  living  has  declined  20  per 
cent?  Weighted  index  numbers  are  used  to  avoid  this 
difficulty.  They  give  to  each  article  an  importance  pro- 
portionate to  the  quantity  marketed,  as  recorded  in  trade 
statistics.  Or  commodities  may  be  weighted  according  to 
the  amount  produced,  as  determined  by  the  statistics  of 


244  Introduction  to  Economics 

production.  Let  us  take  the  price  (ioo)  in  the  year  1900 
as  a  base,  and  assume  that  the  price  of  wheat  has  gone  up 
25  per  cent  by  1905.  The  index  number  for  it  would  then 
be  125.  We  may  assume  that  in  the  meantime  indigo  has 
diminished  in  price  25  per  cent,  or  that  its  index  number 
is  75.  Assume  that  the  production  of  wheat  has  been 
10,000  times  that  of  indigo.  How  shall  we  weight  these 
prices?  Multiply  the  index  number  for  indigo  by  1  and 
that  for  wheat  by  10,000,  because  relatively  it  is  10,000 
times  as  important  (75X1  =  75  and  125X10,000=1,250, 
000),  and  divide  the  sum  of  these  products  by  10,001. 

When  Professor  R.  P.  Falkner,  of  New  York  University, 
was  constructing  index  numbers  for  the  United  States 
Senate  Committee  on  Wages  and  Prices,  he  followed  a 
method  slightly  different  from  that  here  indicated.  He 
assigned  commodities  their  relative  importance  not  on 
amounts  sold  or  produced,  but  on  the  basis  of  amounts 
used  by  the  typical  working  man's  family.  Although  this 
method  does  not  reveal  changes  in  the  general  level  of 
prices,  it  is  of  great  sociological  importance.  While  the 
Falkner  Index  Numbers  are  easily  the  best  means  yet  de- 
vised for  determining  real  wages,  they  are  open  to  the 
criticism  of  taking  wholesale  rather  than  retail  prices. 

Simple  index  numbers  are  easier  to  construct  than  the 
weighted  and,  despite  appearances  to  the  contrary,  there 
is  ordinarily  very  little  difference  in  the  results  obtained. 

19.  The  purposes  of  index  numbers  are  numerous.  New 
uses  are  arising  all  the  time  to  which  this  instrument  or 
indicator  of  price  movements  may  be  applied.  Private 
businesses  as  well  as  governments  use  index  numbers.  We 
shall  point  out  only  a  few  of  the  more  important  uses. 
They  are  used  by  governments  to  aid  in  public  arbitration 


Money  and  Its  Purchasing  Power        245 

or  otherwise  settling  labor  disputes.  If  unions  demand  a 
20  per  cent  advance  in  wages  at  the  time  when  general 
prices  are  remaining  constant  or  diminishing,  their  position 
is  weak.  But  when  prices  are  increasing,  if  the  employer 
is  receiving  a  high  and  increasing  price  for  his  product  and 
paying  a  low  price  for  labor,  the  laborer's  real  income  is 
diminishing  and  the  employer  is  making  a  net  gain  at  the 
laborer's  expense.  If  labor  asks  an  increase  sufficient  to 
take  up  this  slack,  it  has  a  strong  position.  Then,  too,  the 
government  cannot  establish  an  equitable  system  of  taxa- 
tion without  respect  to  real  incomes.  These  are  deter- 
mined by  means  of  index  numbers  which  make  possible 
accurate  comparisons  between  the  expenses  of  doing  busi- 
ness and  the  money  incomes  from  businesses.  To  levy  a 
tax  without  considering  expenses  works  injustice,  for  if 
some  assessments  are  too  low,  other  taxpayers  are  unduly 
burdened.  In  many  instances  such  taxes  prove  prohibi- 
tive. Furthermore,  the  government  must  have  a  basis  of 
judging  price  movements  over  long  periods  of  time  when 
introducing  remedial  measures  to  improve  the  standard  of 
living.  We  read  of  low  prices  in  times  past  and  of  high 
prices  in  the  present.  Any  conclusion  from  the  statistics 
of  past  and  present  prices  is  hasty  and  unwarranted  unless 
carefully  interpreted  through  the  agency  of  index  numbers. 
Index  numbers  may  be  used  by  individuals:  If  one  is 
considering  a  change  in  the  location  of  his  business,  say 
from  Boston  to  Galveston,  he  would  want  to  compare  the 
purchasing  power  of  money  in  these  two  places.  Business 
men  are  continually  comparing  their  expenses  of  doing 
business  (raw  materials,  labor,  rent,  advertising,  salesmen, 
and  so  on)  with  the  selling  prices  of  their  output.  Their 
price  movements  and  selling  policies  rest  in  large  part 


246  Introduction  to  Economics 

upon  the  price  movements  of  the  items  making  up  the 
expenses.  Railway  officials  resort  to  index  numbers  to 
establish  the  necessity  of  raising  rates.  If  the  Standard 
Oil  Company  is  accused  of  fixing  its  prices  too  high,  it 
might  prove  that,  although  its  money  prices  are  rising,  its 
real  prices  are  declining.  Index  numbers  are  used  in  mak- 
ing such  comparisons,  and  in  cases  at  law,  which  turn  upon 
questions  of  fact,  index  numbers  play  an  important  part. 

Of  course,  index  numbers,  as  other  figures,  may  be  jug- 
gled. Some  say,  "Figures  won't  lie,"  but  the  statisticians 
know  better.  Courts  may  be  effectively  deceived  by  a 
skilful  manipulator  of  index  numbers.  In  order  that 
index  numbers  may  properly  show  the  facts,  they  should 
be  so  selected  as  to  compare  things  under  like  conditions. 

This  may  be  shown  by  the  considerations  involved  in 
the  answer  to  this  simple  question:  Has  the  price  of  coal 
advanced  during  the  past  year  ?  In  the  first  place,  there  is 
a  seasonal  demand  for  coal;  it  is  more  in  demand  during 
cold  weather.  It  would  be  an  error  to  compare  the  July 
price  of  191 8  with  the  November  price  of  19 19.  The  situ- 
ations are  not  comparable.  Like  periods  of  the  year  should 
be  selected  for  comparison.  Secondly,  due  regard  must 
be  given  to  place.  Coal  on  the  Pacific  coast  is  much  higher 
than  in  the  East.  If  one  finds  that  in  November,  19 18, 
coal  is  $10  a  ton  in  Scranton,  and  that  at  the  same  date 
in  191 9  it  sells  for  $15  in  San  Francisco,  he  has  no  basis 
for  the  conclusion  that  coal  has  advanced  in  price.  The 
Scranton  price  should  be  compared  at  the  two  dates. 
Again,  local  conditions  such  as  fires,  floods,  and  strikes 
may  so  affect  prices  at  particular  places  that  no  general 
conclusion  can  be  drawn.  Also  the  same  kind  and  quality 
of  coal  must  be  compared  at  the  two  dates.     No  safe  con- 


Money  and  Its  Purchasing  Power        247 

elusion  can  follow  a  comparison  of  the  price  of  a  good 
grade  at  one  date  with  that  of  a  poor  grade  at  another 
date. 

General  index  numbers  should  be  given  such  a  balance 
as  to  represent  fairly  all  prices.  If,  for  instance,  forty 
commodities  are  selected  and  intended  to  be  representa- 
tive of  general  prices,  they  would  fail  of  their  purpose 
were  several  commodities  chosen  from  one  group  of  prod- 
ucts. The  prices  of  commodities  of  one  group  tend  to 
move  sympathetically.  If  ten  out  of  the  forty  commodi- 
ties were  different  kinds  of  fish,  a  movement  in  the  price 
of  fish  would  have  disproportionate  weight  in  making  up 
the  average. 

Lastly,  the  interpretation  of  the  figures  representing 
price  levels  would  be  aided,  and  comparisons  in  different 
years  simplified,  if  the  unit  for  measuring  any  commodity 
be  taken  as  a  "dollar's  worth."  Let  every  price  in  the 
base  year  be  a  dollar,  then  the  average  of  all  prices  would 
be  a  dollar.  If  in  the  base  year  a  dollar's  worth  of  bread 
be  ten  loaves,  and  if  during  the  following  year  ten  loaves 
sell  for  $1.50,  we  have  a  ready  comparison  of  prices  at  the 
two  dates.  In  the  same  way  take  a  dollar's  worth  of  coal, 
shoes,  wool,  and  so  on,  throughout  the  selected  list,  and 
make  an  average  of  the  movements  of  the  several  prices 
to  determine  variations  in  the  purchasing  power  of  money. 

20.  Exercises. — 1.  Is  the  value  of  gold  due  to  the  action 
of  government  ?  Was  tobacco  in  early  Virginia  money  be- 
cause the  government  declared  it  so?  Had  a  law  been 
passed  against  the  decline  of  continental  currency,  would 
this  have  arrested  its  decline  ? 

2.  The  law  which  regulates  the  purchasing  power  of 
money  is  not  made  by  Congress.     Is  this  true?    Legisla- 


248  Introduction  to  Economics 

tion  on  the  money  question  is  good  or  poor  to  the  degree 

that  it  conforms  with     

Finish  the  sentence,  and  tell  why  you  so  finish  it. 

3.  What  is  fiat  money?  Could  its  purchasing  power  be 
made  to  appreciate?  How?  If  all  the  different  denomi- 
nations of  media  of  exchange  were  doubled  in  number, 
would  all  money  be  fiat? 

4.  What  were  the  reasons  pointed  out  in  paragraph  3 
of  this  chapter  for  the  increase  in  prices  following  the  issue 
of  greenbacks  ? 

5.  Does  a  dollar  possess  the  same  purchasing  power  for 
the  poor  man  and  the  rich  man?  Does  it  reflect  the  same 
marginal  desirabilities  ? 

6.  The  "general  level  of  prices"  and  the  "purchasing 
power  of  money"  are  two  ways  of  expressing  the  same 
idea.  Explain.  In  what  way  is  the  price  of  shoes  related 
to  the  general  level  of  prices  ? 

7.  Professor  Fetter  puts  the  question,  "Why  does  nearly 
all  the  gold  produced  in  California  leave  the  State?  What 
keeps  any  of  it  there?"     Answer  it. 

8.  If  at  the  same  time  wheat  is  selling  at  $2  a  bushel  in 
San  Francisco  and  Philadelphia,  would  any  be  shipped 
from  one  of  these  places  to  the  other?  An  ounce  of  gold, 
900  fine,  is  alike  at  San  Francisco  and  Philadelphia,  $18,604. 
Why  is  gold  ever  shipped  from  California  to  New  York  ? 

9.  A  dollar  contains  25.8  grains  of  standard  gold — that 
is,  gold  nine-tenths  fine.  An  ounce  contains  480  grains. 
How  many  dollars  will  an  ounce  make?  100  ounces?  A 
government  officer  says  that  the  value  of  gold  is  constant 
because  it  is  fixed  in  price.     Is  this  true  ? 

10.  Does  the  price  which  a  dentist  pays  for  his  gold 
remain  the  same  because  gold  is  stable  in  value  ? 

"Gold  is  stable  in  terms  of  itself  and  in  terms  of  itself 
only."  Explain.  Would  this  be  true  of  corn  were  we  to 
make  it  the  standard  ? 

If  the  money  price  of  gold  can  neither  increase  nor  de- 
crease, shall  we  regard  gold  as  an  exception  to  the  law  that 
prices  are  fixed  by  supply  and  demand  ? 


Money  and  Its  Purchasing  Power        249 

ii.  Dr.  Scott  Nearing  says:  "Theoretically,  if  the 
amount  of  the  circulating  medium  is  in  any  large  sense  a 
cause  of  the  increase  in  prices,  the  prices  of  all  commodities 
should  have  risen  in  approximately  the  same  ratio." 
Criticise. 

12.  Why  might  an  increased  resort  to  barter  have  the 
same  effect  upon  money  prices  as  an  increase  in  money  ? 

13.  A  country  using  gold  money  as  its  sole  medium  of 
exchange,  under  free  and  gratuitous  coinage,  makes  the 
following  changes:  it  imposes  a  seigniorage  charge  of  10 
per  cent,  but  without  giving  up  free  coinage  or  reducing 
the  amount  of  fine  gold  in  the  coin.  To  what  extent  and 
in  what  direction  will  the  value  of  money  change,  if  at  all — 

(a)  If  the  number  of  goods  exchanged  gradually  in- 
creases 5  per  cent  ? 

(b)  If  the  number  of  goods  exchanged  gradually  in- 
creases 25  per  cent? 

Give  your  reasons  clearly.  (Fetter.) 

14.  How  may  long-time  contracts  retard  the  adjust- 
ment of  prices  ? 

15.  "The  nations  in  this  great  war  can  never  pay  their 
debts  for  the  very  simple  reason  that  they  owe  more  than 
the  total  of  all  money  on  earth."     Criticise. 

16.  Assume  that  there  is  twenty  dollars'  worth  of  wealth 
in  the  United  States  for  every  dollar  in  money,  should  we 
increase  the  money  twentyfold  would  the  discrepancy  be- 
tween money  and  wealth  disappear?  or  decrease?  or  in- 
crease ?  or  remain  the  same  ? 

17.  Criticise  these  statements:  'There  is  not  enough 
money  in  the  world  to  do  the  money-work."  "The  money 
is  not  coming  out  of  the  ground  fast  enough  to  meet  the 
new  conditions  of  life."  "The  railways  of  this  country 
could  never  have  been  built  in  the  early  fifties  had  it  not 
been  for  the  lucky  discovery  of  gold  in  California  in  1849, 
which  provided  the  means  by  which  we  could  pay  for  the 
construction  of  the  railways." 

18.  What  is  the  difference  between  simple  and  weighted 


£50  Introduction  to  Economics 

index  numbers?     Mention  different  purposes  which  index 
numbers  serve. 

19.  If  you  were  to  make  a  set  of  index  numbers  for  the 
purpose  of  determining  the  real  wages  of  labor,  would  it 
make  any  difference  as  to  the  kind  of  commodities  you 
might  select  as  a  basis  for  your  index  numbers?  Why  or 
why  not? 

Suppose  you  select  50  commodities  for  this  purpose, 
would  it  be  fair  should  10  of  these  commodities  be  different 
varieties  of  breakfast  foods  ? 

20.  At  a  given  time  the  following  commodity  prices 
prevailed:  Cotton  (raw),  $0.10  per  lb.;  wheat,  $1.00  per 
bu.;  sugar,  $0.07  per  lb.;  potatoes,  $1.00  per  bu.;  beef  (for 
roasting),  $0.25  per  lb.;  shoes,  $r.oo  per  pair;  cotton  cloth 
of  a  standard  grade,  $0.12  per  yd.;  woollen  cloth  of  a 
standard  grade,  $1.25  per  yd.;  men's  hats,  $4,  and  coal, 
$7  per  ton. 

At  a  later  date  the  prices  of  the  same  commodities  were 
respectively  as  follows:  $0.13,  $1.05,  $0.06,  $1.10,  $0.30, 
$5.75,  $0.15,  $1.20,  $4.50,  and  $6.50^ 

Tabulate  these  facts  and  compute  index  numbers,  which 
will  show: 

1.  Changes  in  the  price  level  of  all  ten  commodities. 

2.  Changes  in  the  price  level  of  the  articles  of  food. 

3.  Changes  in  the  price  level  of  the  articles  of  clothing. 
(Fetter.) 


CHAPTER  XII 
MONEY  STANDARDS 

i.  Money  movements  automatic.  2.  Selection  of  coins.  3.  Gresham's 
law.  4.  When  Gresham's  law  will  not  work.  5.  Bimetallism.  6.  The  com- 
pensatory principle.  7.  The  meaning  of  terms.  8.  When  bimetallism  will 
not  work.  9.  When  bimetallism  will  work.  10.  Arguments  for  bimetal- 
lism. 11.  Argument  against  bimetallism  considered.  12.  Historical  sum- 
mary. 13.  A  summary  review.  14.  Free-silver  agitation  of  1896.  15.  The 
gold  standard  on  trial.     16.  Different  standards  defined.     17.  Exercises. 

i.  Money  Movements  Automatic. — The  money  of  a 
country  circulates  in  the  land  of  its  issue,  not  according  to 
weight  but  according  to  the  stamp  it  bears.  The  grocery- 
man  does  not  weigh  a  piece  of  money  offered  him  in  pay- 
ment for  goods,  he  looks  at  the  inscription  upon  the  coin 
offered  and  accepts  it  at  face  value  without  further  ado. 
But  if  a  gold  coin,  marked  ten  dollars,  is  offered  to  a  foreign 
creditor,  it  is  accepted,  not  according  to  its  face  value, 
but  according  to  its  bullion  content.  Were  American  gold 
coins  so  worn  as  to  be  diminished  five  per  cent  in  weight, 
it  would  take  ten  dollars  and  fifty  cents  in  these  coins  to 
pay  a  ten-dollar  obligation  to  an  English  creditor. 

So  much  for  the  basis  of  international  money  payments; 
let  us  now  inquire  as  to  the  movement  of  money  between 
countries.  Should  Canada  enjoy  a  bumper  crop  and,  as 
well,  a  large  output  from  her  forests,  mines,  and  fisheries, 
she  would  doubtless  enjoy  an  abundance  of  goods  at  low 
prices.  If  at  the  same  time  unfavorable  weather,  pests, 
and  labor  disputes  work  against  the  production  of  supplies 
in  the  United  States,  her  people  must  pay  high  prices,  and 
can  enjoy  a  large  consumption  of  goods  only  by  securing 

251 


252  Introduction  to  Economics 

commodities  from  Canada  or  elsewhere.  But  two  sets  of 
prices,  the  one  high  and  the  other  low,  cannot  under  nor- 
mal trading  conditions  long  remain  side  by  side.  The  situ- 
ation resembles  that  of  two  reservoirs  side  by  side,  the  one 
full  and  the  other  half  full  of  water.  So  long  as  they  are 
independent  of  each  other  the  water  in  the  two  will  remain 
at  these  unequal  levels;  but  once  a  connecting  pipe  is  intro- 
duced between  the  two,  automatically  the  water's  flow 
will  leave  but  one  level. 

The  wise  old  saying  holds  true  here:  "A  good  market  to 
sell  in  is  a  poor  one  to  buy  in,  and  a  good  market  to  buy 
in  is  a  poor  one  to  sell  in."  Canada  will  find  the  United 
States  a  good  market  to  sell  in,  and  the  United  States  will 
find  Canada  a  good  market  to  buy  in.  The  buyer  in  the 
United  States,  finding  that  his  money  has  a  higher  purchas- 
ing power  across  the  line,  will  send  his  money  thither  for 
goods.  Good  will  continue  to  flow  one  way  and  money 
the  other  until  prices  are  equalized  in  the  two  countries. 
No  investigator  will  make  the  discovery  that  Canada  has 
proportionately  less  money,  and  no  formal  negotiations 
will  be  inaugurated  to  equalize  the  money  supplies  in  the 
two  countries.  Individual  traders,  prompted  by  the  prin- 
ciple of  self-interest,  and  knowing  little  and  caring  less 
about  relative  money  supplies,  will  so  trade  as  to  level 
automatically  prices  between  these  countries.  The  work- 
ings of  this  automatic  regulation  were  formerly  slow  and 
obstructed,  as  traders  depended  upon  weekly  letters  and 
price-currents.  To-day  the  principle  works  with  a  free- 
dom and  fulness  of  movement,  trade  news  being  flashed 
far  and  wide,  daily  and  even  hourly. 

2.  Selection  of  Coins. — While  a  local  overstock  of  gold 
coin  is  flowing  into  foreign  markets,  it  will  also  be  flow- 


Money  Standards  253 

ing  into  the  arts  market — both  local  and  foreign.  Slack 
business  and  a  shortage  in  the  production  of  wheat,  beef, 
and  coal  will  cause  a  relative  oversupply  of  money,  so 
money  will  go  to  the  melting-pot  as  well  as  to  the  other 
markets  of  the  world.  The  two  sources  of  outlet  for  a 
local  oversupply  of  money  are  foreign  markets  and  the 
melting-pot. 

Will  coins  be  exported  and  melted  indiscriminately? 
The  answer  is  in  the  negative,  and  it  involves  one  of  the 
most  significant  laws  in  Economics.  Coins  are  not  selected 
by  chance,  not  sent  out  because  they  are  closest  to  the  place 
of  export,  not  melted  because  they  are  nearest  the  manu- 
facturer of  jewelry.  We  shall  now  inquire  as  to  the  prin- 
ciple of  selection.  They  are  not  the  fittest  coins  but  the 
unfittest  which  shall  remain  in  circulation. 

3.  Gresham's  law  teaches  that  the  bad  money  drives 
the  good  out  of  circulation.  Let  the  student  commit  this: 
"Bad  money  always  drives  out  good  money,  when  issued 
in  abundance."  Despite  her  vanity  and  many  administra- 
tive blunders,  Queen  Elizabeth,  as  above  remarked,  was  an 
able  ruler,  the  one  element  of  strength  that  distinguished 
her  being  her  keen  judgment  of  men,  that  enabled  her  to 
officer  the  administration  with  the  ablest  thinkers  and  ad- 
visers in  England.  Sir  Thomas  Gresham,  founder  of  the 
Royal  Exchange  of  London,  was  the  chief  financial  agent 
under  Elizabeth.  He  investigated  for  his  government  the 
condition  of  coins  in  Amsterdam,  and  found  that  the  old 
and  worn  coins  drove  out  of  circulation  the  new  coins  of 
full  weight,  which  were  issued  in  abundance.  This  prin- 
ciple, that  the  bad  money  tends  to  drive  out  the  good,  was 
noted  by  so  ancient  an  observer  as  Aristophanes  (B.C.  444- 
380) ,  but  it  was  discovered  anew  and  brought  prominently 


254  Introduction  to  Economics 

before  the  English-speaking  world  by  the  noted  adviser  of 
Elizabeth. 

The  original  formulation  of  this  law  made  no  reference 
to  the  exportation  of  gold  coin  as  caused  by  an  issue  of  fiat 
money.  More  than  a  few  writers  have  erred  at  this  point. 
Gresham  referred  to  coins  of  the  same  metal  but  of  different 
weights  on  account  of  wear,  clipping,  and  abrasion.  If  in 
a  gold-using  country  exportation  or  conversion  of  money 
into  the  arts  takes  place,  the  heavier  coins  will  be  selected 
for  these  purposes.  As  money,  heavy  coins  are  worth  no 
more  than  abraded  coins,  but  when  sold  by  weight,  as  they 
are  in  the  arts  and  export  markets,  they  are  worth  more. 
While  this  law  was  originally  formulated  with  reference 
to  coins  made  of  the  same  metal,  the  principle  involved  is 
easily  applied  in  any  case  where  bad  and  dear  money  cir- 
culate in  the  same  market. 

4.  When  Gresham's  Law  Will  Not  Work.— A  Virginia 
fruit-grower  permits  his  family  to  use  only  the  sortings — 
the  green,  knotty,  inferior  apples,  and  his  neighbors  call 
him  penurious.  He  answers  the  charge:  "We  can't  afford 
to  use  good  apples  when  there  are  plenty  of  poor  ones." 
And  this  is  the  way  the  nations  act  with  respect  to  their 
money.  Poor  money  serves  the  functions  of  the  home 
market  as  well,  and  good  money  serves  the  other  functions 
better;  there  is  great  economy  in  Gresham's  law.  But  this 
law  will  not  always  work,  for  were  it  a  bald  truth,  without 
exceptions,  that  the  bad  money  drives  out  the  good,  then 
a  deficient  penny  would  deplete  a  treasury. 

No  one  would  melt  a  new  ten-dollar  gold  coin  into  bul- 
lion, if  that  bullion  were  worth  less  than  the  ten  dollars, 
as  no  one  will  intentionally  convert  metal  from  a  more 
valuable   to   a  less  valuable   form.     Gresham's  law  will 


Money  Standards  255 

never  work,  in  the  sense  that  the  best  coins  will  find  the 
melting-pot,  when  the  supply  of  money  is  so  small  relative 
to  the  demand  for  it  that  the  metal  will  be  worth  more  in 
the  form  of  a  coin  than  in  the  form  of  bullion.  It  will  not 
work  when  money  is  worth  more  than  its  bullion  content. 

We  now  know  that  metal  will  not  be  transformed  from 
coins  to  bullion  when  the  purchasing  power  of  such  coins 
is  superior  to  that  of  their  bullion  content.  But  would 
this  prevent  the  operation  of  Gresham's  law  in  the  sense 
that  the  lighter  coins  cause  an  exportation  of  the  heavier 
ones?  No,  the  heavier  coins  may  be  exported  when  they 
are  in  no  danger  of  the  melting-pot. 

To  return  to  the  supposition  regarding  Canada's  abun- 
dance and  our  shortage  of  goods,  her  need  for  money  w^s 
in  excess  of  the  supply.  Canadians  might  have  cheep 
money  and  dear  circulating  side  by  side,  the  bad  money 
driving  the  dear  money  neither  to  the  melting-pot  nor  to 
the  United  States  or  any  other  country.  The  good  money 
would  not  be  driven  to  the  melting-pot,  because  it  would 
be  worth  more  in  the  form  of  money,  and  it  would  not 
be  driven  out  of  the  country  because  its  purchasing  power 
in  Canada  would  be  higher  than  if  it  were  sent  out  of  the 
country. 

A  knowledge  of  Gresham's  law  introduces  a  discussion 
of  bimetallism,  for  the  operation  of  this  law  will  maintain 
a  fixed  ratio  between  the  purchasing  powers  of  gold  and 
silver.  Should  either  metal  become  cheaper  debtors  will 
be  eager  to  pay  with  it.  This  will  at  once  increase  the 
demand  for  the  cheaper  and  lower  the  demand  for  the 
dearer  metal,  thereby  making  them  equal. 

5.  Bimetallism  means  the  free  coinage  of  two  metals  at 
a  fixed  ratio,  the  coins  of  either  being  legal  tender  as  the 


256  Introduction  to  Economics 

debtor  may  elect.  Monometallism  is  a  monetary  system 
where  one  metal  is  given  the  right  of  free  coinage.  Bi- 
metallism as  well  as  monometallism  may  be  thought  of  as 
a  single  standard.  Two  metals  maintained  at  a  parity 
perform  precisely  the  same  functions;  they  lose  their  inde- 
pendence in  a  monetary  sense  and  become  one  and  the 
same.  A  country  may  have  the  bimetallic  standard  based 
on  gold  and  silver,  and  coin  other  metals,  as  copper  and 
nickel.  Coins  of  other  metals,  however,  are  token  and 
not  primary  money. 

The  common  man  of  this  generation  thinks  of  bimetal- 
lism as  a  mere  theory — something  nice  to  talk  about  but 
dangerous  and  unworkable  if  established.  He  is  not  in- 
formed that  mankind  has  had  far  more  experience  and, 
may  I  add,  more  satisfactory  experience  with  bimetallism 
than  with  monometallism  and  that  prior  to  the  nineteenth 
century  no  nation  definitely  adopted  monometallism.  Eng- 
land broke  the  rule  in  1816,  but  neither  the  United  States 
nor  European  nations  followed  her  example  until  after 
1870.  Bimetallism  is  workable  and  it  is  not  involved  in 
mystery  as  many  are  led  to  believe.  It  rests  upon  a  sin- 
gle definite  and  simple  principle  which  explains  the  ex- 
traordinary permanence  of  the  ratio  of  exchange  of  gold 
and  silver  under  bimetallism. 

6.  The  compensatory  principle  is  the  fundamental  fact 
in  bimetallism.  This  principle  recognizes  two  great  de- 
mands for  both  gold  and  silver;  their  use  in  the  arts  and 
in  the  coinage  of  money.  The  monetary  demand  is  large 
and  any  change  in  it  reacts  quickly  upon  the  purchasing 
power  of  these  metals.  This  very  fact — the  quick  and 
sensitive  response  of  the  purchasing  power  of  these  metals 
to  changes  in  demand — makes  it  impossible  for  either  gold 


Money  Standards  257 

or  silver,  under  bimetallism,  to  fall  much  below  the  other, 
and  impossible  for  them  to  remain  separate  in  price.  After 
the  gold  discoveries  in  California  and  Australia,  John  E. 
Cairnes,  the  eminent  English  economist,  wrote  (and  I  give 
this  illuminating  quotation,  because  it  shows  the  nature  of 
the  compensatory  principle):  "The  crop  of  gold  has  been 
unusually  large;  the  increase  in  the  supply  has  caused  a 
fall  in  its  value;  the  fall  in  its  value  has  led  to  its  being 
substituted  for  silver;  a  mass  of  silver  has  thus  been  dis- 
engaged from  purposes  which  it  was  formerly  employed  to 
serve;  and  the  result  has  been  that  the  two  metals  have 
fallen  in  value  together."  If,  according  to  Gresham's  law, 
gold  tends  to  drive  silver  out,  less  silver  and  more  gold  will 
be  used  in  coinage.  This  decrease  in  the  demand  for  silver 
will  lower  its  purchasing  power;  this  increase  in  the  de- 
mand for  gold  will  increase  its  purchasing  power;  the  result 
will  be  a  coming  together  of  the  two.  This  interaction  of 
the  forces  of  supply  and  demand  which  maintains  a  fixed- 
ness of  the  ratios  between  gold  and  silver  is  known  as  the 
compensatory  principle. 

7.  The  Meaning  of  Terms. — When  a  coin  is  adopted  the 
government  determines  how  much  gold  or  silver  to  put  into 
it.  The  gold  dollar  contains  23.22  grains  of  fine  gold,  and 
2.58  grains  of  alloy  to  harden  the  coin  so  that  it  will  stand 
wear;  the  total  or  standard  weight  is  fixed  by  law  at  25.8 
(23.22  +  2.58)  grains.  The  silver  dollar  contains  412.5 
grains,  which  is  90  per  cent  fine  (371.25  grains  of  fine  silver 
plus  41^  alloy).  The  ratio  of  silver  to  gold  in  our  coins 
is  371.25  :  23.22  ::  15.98  : 1.  This  is  so  near  16  :  1  that  we 
speak  of  it  as  such.  16:1  means  simply  that  there  is  six- 
teen times  as  much  fine  silver  in  a  silver  dollar  as  there  is 
fine  gold  in  a  gold  dollar.     But  it  must  not  be  concluded 


258  Introduction  to  Economics 

that  we  are  on  a  bimetallic  standard  because  we  coin  these 
metals  at  the  ratio  of  16 :  i.  When  is  a  nation  on  a  bime- 
tallic standard  ?  When  it  declares  for  the  free  and  unlim- 
ited coinage  of  both  metals  and  gives  to  both  equal  debt- 
paying  power. 

Let  us  next  inquire  the  meaning  of  the  terms,  "market 
ratio"  and  "mint  ratio."  When  gold  and  silver  bullion 
change  in  price  with  respect  to  one  another  and  to  other 
commodities,  independent  of  their  exchange  power  in  the 
form  of  money,  their  "market  ratios"  have  changed  inde- 
pendently of  their  "mint  ratios."  If  one  grain  of  gold  in 
the  form  of  coin  is  made  by  law  to  exchange  for  sixteen 
grains  of  silver  in  the  form  of  coin,  their  "mint  ratio"  is 
i :  1 6.  But  if  a  rich  silver-mine  is  opened,  silver  bullion 
will  fall  in  exchange  power,  and  if  it  falls  until  one  ounce 
of  gold  bullion  will  exchange  in  the  open  market  for  thirty- 
two  ounces  of  silver,  the  "market  ratio"  has  fallen  to  i :  32. 

8.  When  Bimetallism  Will  Not  Work.1 — Assume  that  a 
country  has  a  bimetallic  standard  at  a  ratio  of  16:  1,  and 
that  meanwhile  the  market  ratio  is  32:1.  How  would 
Smith,  a  gold-bullion  owner,  pay  Jones  an  obligation  of 
$10?  He  can  pay  this  debt  in  either  of  two  ways:  He  can 
take  232.2  grains  of  gold  (the  bullion  content  of  $10)  to  the 
mint,  exchange  it  for  $10,  take  this  $10  and  pay  the  debt. 
Or  he  can  take  but  one-half  of  this  gold  (116.1  grains)  to 
the  bullion  market  and  trade  it  for  enough  silver  bullion 
to  exchange  at  the  mint  for  $10  in  silver,  and  with  this 
pay  Jones  in  full.  All  debtors  would  pay  their  obligations 
with  silver;  gold  would  go  out  of  circulation;  business  trans- 
actions would  be  adjusted  to  the  money  in  circulation;  there 
would  be  bimetallism  legally  and  monometallism  in  fact. 

1  An  excellent  discussion  of  bimetallism  is  found  in  F.  A.  Walker's  Po- 
litical Economy   (advanced  course,  3d  ed.)  pp.  463-475. 


Money  Standards  259 

It  must  be  observed,  however,  that  as  gold  in  this  ex- 
ample loses  its  monetary  demand,  it  tends  to  decline  in 
purchasing  power;  also,  the  demand  for  silver  and  conse- 
quently its  purchasing  power  is  increased,  because  it  must 
fill  the  place  made  vacant  by  the  withdrawal  of  gold.  The 
establishment  of  bimetallism  in  a  few  unimportant  money- 
using  countries  will  have  the  effect  of  making  the  pur- 
chasing power  of  these  metals  more  nearly  equal.  But  bi- 
metallism will  not  work  so  long  as  the  monetary  demand 
for  gold  and  silver  is  not  large  enough  to  bring  the  purchas- 
ing power  of  these  metals  to  the  ratio  established  by  law. 
In  all  such  cases  Gresham's  law  operates  to  the  defeat  of 
bimetallism. 

9.  When  Bimetallism  Will  Work. — Bimetallism  will  suc- 
ceed when  Gresham's  law  ceases  to  operate  or  to  expel  the 
dearer  metal  from  circulation.  This,  of  course,  will  be 
when  there  is  no  longer  a  cheaper  and  dearer  metal,  but 
when  gold  and  silver  are  equal  to  one  another  in  purchas- 
ing power  at  the  legal  ratio.  The  compensatory  principle 
will  hold  them  at  this  equality  in  purchasing  power  when 
the  mint  ratio  is  fixed  reasonably  near  the  market  ratio, 
and  when  there  is  a  reasonable  monetary  demand  for  the 
metal. 

Assume  the  nations  of  the  world  to  be  divided  into  three 
approximately  equal  groups  of  four  countries  each,  and 
that  one  group  is  composed  of  silver-using  countries,  an- 
other is  composed  of  bimetallic  countries  holding  the  ratio 
16:  1,  and  that  the  remaining  group  consists  of  gold-using 
countries.     They  may  be  represented  thus: 


Silver-using 
countries. 

Bimetallic 
countries. 

Gold-using 
countries. 

260  Introduction  to  Economics 

What  will  be  the  effects  of  a  large  increase  in  the  output 
of  silver?  This  will  cheapen  silver  relatively  to  gold. 
The  owners  of  silver  bullion  will  hasten  to  take  advantage 
of  the  situation  in  the  bimetallic  group,  where  they  can 
exchange  their  silver  for  gold  at  the  rate  of  16:  i.  The 
gold  thus  displaced  by  the  new  silver  will  pass  into  its 
best  market,  the  gold-using  countries.  Gold  will  decline  in 
purchasing  power  because  of  the  diminished  need  for  it  in 
bimetallic  countries,  and  because  of  the  largely  increased 
supply  in  gold-using  countries.  Forces  are  in  operation 
meanwhile  to  increase  the  purchasing  power  of  silver.  It 
has  to  supply  the  place  made  vacant  by  the  departure  of 
gold  from  the  bimetallic  group;  then,  too,  it  will  be  de- 
manded in  the  silver-using  countries.  A  sudden  increase 
in  the  supply  of  silver  will  cause  the  price  of  the  bullion 
content  of  coins  to  be  less  than  their  purchasing  power  in 
the  form  of  money,  thus  making  it  profitable  for  silver- 
owners  to  have  their  bullion  coined  in  the  silver  group  as 
well  as  in  the  bimetallic  group. 

Should  the  cheapening  effect  on  silver  be  large  at  a  time 
when  commercial  forces  are  advancing  the  purchasing 
power  of  gold,  there  will  be  a  rapid  substitution  of  silver 
for  gold  in  the  bimetallic  group.  If  there  be  an  unusual 
need  for  additional  gold  in  the  gold-using  countries,  they 
can  draw  for  their  additional  needs  only  from  the  bimetallic 
states.  Will  the  gold  become  exhausted  in  these  coun- 
tries? Such  is  possible  but  not  likely.  The  increased 
supply  of  silver  will  find  a  market  covering  two-thirds  of 
the  money-using  world — the  silver-using  and  bimetallic 
countries.  This  extensive  demand  will  not  permit  a  rapid 
decline  in  its  purchasing  power.  The  displaced  gold  will 
find  a  market  in  but  one-third  of  the  money-using  coun- 


Money  Standards  2(51 

tries,  and  these  countries  already  have  a  normal  gold  sup- 
ply. It  is  all  but  certain  that  the  compensatory  principle 
will  make  these  metals  equal  to  each  other  in  purchasing 
power  at  the  legal  ratio  long  before  the  bimetallic  group 
finds  its  more  valuable  metal  exhausted. 

Assume  that  states  from  each  of  the  monometallic 
groups  change  to  the  bimetallic  standard,  leaving  two 
countries  in  each  of  the  monometallic  groups  and  giving 
eight  countries  to  the  bimetallic  group.  It  may  be  rep- 
resented thus: 


2  Silver- 
using 
countries. 

8  Bimetallic  countries 

2  Gold- 
using 
countries. 

Beyond  question,  the  bimetallic  standard  is  now  safe. 
The  base  of  the  system  is  broadened  to  cover  two-thirds 
of  the  money-using  world;  if  the  cheaper  threaten  to  drive 
the  dearer  metal  from  this  extensive  area,  it  can  go  to  only 
two  states  already  normally  supplied;  these  two  states 
would  be  surfeited  with  the  metal  long  before  the  great 
bimetallic  area  is  drained.  The  extensive  area  demanding 
the  metal  tending  to  decline  will  retard  or  arrest  its  de- 
cline; the  limited  area  demanding  the  dearer  metal  is  soon 
fully  supplied,  thus  causing  that  metal  to  decline. 

The  reasoning  under  the  last  two  headings  leads  to  the 
conclusion  that  national  bimetallism  cannot  succeed,  but 
that  international  bimetallism,  if  sufficiently  broad,  will 
succeed. 

io.  Arguments  for  Bimetallism.— National  bimetallism  is 
unworkable  and  there  is  no  defense  for  it.  International 
bimetallism  would  be  workable.  Two  primary  arguments, 
to  say  nothing  of  minor  arguments,  have  been  advanced 


262  Introduction  to  Economics 

for  it.  These  are:  Bimetallism  would  give  to  the  world  a 
more  stable  standard;  it  would  facilitate  exchange  between 
gold  standard  and  silver  standard  countries. 

The  needs  for  a  stable  standard  are  apparent.  If  the 
purchasing  power  of  money  rises,  debtors  are  injured  be- 
cause they  must  pay  back  more  purchasing  power  than 
they  have  received,  or  if  the  purchasing  power  "of  money 
declines  creditors  must  take  in  payment  less  purchasing 
power  than  they  have  given.  Rising  prices  disturb  indus- 
try because  price  movements  are  not  uniform;  declining 
prices  throw  a  blanket  over  industry.  One  hesitates  to 
invest  his  money  in  business  when  prices  are  declining,  for 
he  buys  at  a  higher  and  sells  at  a  lower  price.  Rising 
prices  stimulate  most  branches  of  industry,  because  capi- 
talists hasten  to  invest  their  means  at  the  lower  to  sell  out 
later  at  the  higher  price. 

How  would  international  bimetallism  stabilize  the  purchas- 
ing power  of  money  ?  The  two  metals  will  be  tied  together 
in  one  system;  the  volume  of  gold  and  silver  when  com- 
bined would  be  so  large  that  temporary  movements  in 
the  supply  of  either  would  have  little  effect  on  the  pur- 
chasing power  of  money.  The  probabilities  are  (and  the 
history  of  the  metals  bears  out  the  point)  that  gold  and 
silver  will  not  together  advance  or  decline  in  purchasing 
power  in  the  same  degree.  If  gold  tends  to  rise  rapidly, 
while  the  tendency  is  for  silver  to  move  as  rapidly  in  the 
opposite  direction,  since  they  are  tied  together,  the  pur- 
chasing power  of  money  cannot  vary.  If  silver  tends  rap- 
idly downward  while  gold  tends  downward  but  slowly,  the 
gold  will  retard  the  decline  in  money.  The  purchasing 
power  of  money  varies  with  the  average  variation  in  the 
volume  of  the  two  metals.     The  production  of  gold  and 


Money  Standards  263 

silver  are  not  related,  and  there  is  no  reason  why  their  out- 
put should  vary  equally  in  the  same  direction;  in  fact,  they 
have  in  the  main  tended  to  vary  in  opposite  directions. 

Professor  J.  F.  Johnson  closes  his  discussion  of  this 
topic  with  these  words:  "Since  stability  of  the  standard  is 
the  most  important  quality  it  can  possess,  the  argument  is 
in  favor  of  bimetallism."  l 

How  would  international  bimetallism  facilitate  exchanges 
between  silver-using  and  gold-using  countries?  It  would 
simplify  trading  and  all  kinds  of  contracts  between  these 
countries.  At  present  exchange  relations  of  gold  and 
silver  fluctuate  constantly.  If  a  New  York  merchant  is 
quoted  the  price  of  silk  in  China  (a  silver-standard  coun- 
try) he  is  puzzled  to  know  how  much  gold  he  must  give. 
If  he  sells  to  a  merchant  in  Shanghai  he  is  paid  in  silver, 
the  gold  price  of  which  may  vary  considerably  before  the 
transaction  is  completed.  He  may  lose  or  he  may  gain, 
depending  upon  the  turn  in  the  relative  purchasing  powers 
of  the  metals. 

Dealers  in  foreign  exchange  speculate  in  these  variations 
of  money;  they  assume  the  risks.  Because  dealers  in  for- 
eign exchange  assume  the  risk,  the  New  York  exporter  may 
know  exactly  how  much  American  money  he  will  receive 
for  his  draft  on  the  silver  country.  The  risk,  none  the 
less,  exists  regardless  of  who  assumes  it;  it  makes  trade 
inconvenient  and  expensive.  Moreover,  long-time  con- 
tracts can  be  little  more  than  a  gamble  between  gold  and 
silver  using  countries. 

The  fluctuations  between  the  metals  discourage  a  nor- 
mal flow  of  investment  funds  between  nations  of  different 
monetary  standards.     Tariff  walls  and  unstable  monetary 
1  Money  and  Currency,  revised  ed.,  p.  222. 


264  Introduction  to  Economics 

systems  removed,  capital  would  seek  the  best  profits  the 
world  over.  The  American  financier  fears  to  invest  in  a 
country  of  another  standard  lest  his  investments  return  to 
him  in  depreciated  money. 

Silver-standard  countries  fear  to  contract  obligations  in 
gold-standard  countries.  England  formerly  made  loans  of 
enormous  sums  in  pounds  sterling  to  British  India  (a  silver- 
using  country  prior  to  1893).  The  interest  alone  on  these 
loans  amounted  to  about  £16,000,000  in  gold  which  they 
were  compelled  to  pay  annually  in  London.  The  Indian 
government  noted  two  significant  facts:  (1)  The  purchasing 
power  of  their  money  in  the  home  country  varied  but  little 
through  time.  (2)  Silver  continued  to  decline  in  terms  of 
gold.  It  took  just  twice  as  many  rupees  (the  Indian  coin) 
in  1893  t°  buy  a  pound  sterling  in  London  as  it  took  in 
1873.  Their  foreign  debt  grew  more  and  more  burden- 
some because  it  took  more  and  more  of  their  money  to 
pay  London;  and  this  despite  the  fact  that,  in  terms  of 
gold,  her  annual  dues  to  London  were  not  increasing  and 
her  money  retained  about  the  same  purchasing  power  at 
home. 

A  similar  situation  arose  after  the  Boxer  troubles  in 
China,  when  that  country  was  required  to  pay  considerable 
indemnities  to  gold-standard  countries. 

11.  Argument  Against  Bimetallism  Considered. — There 
are  eminent  authorities  on  the  money  question  who  object 
to  bimetallism.  One  such  authority  states:  "Whenever  two 
kinds  of  money  are  legal  tender,  the  cheaper  will  be  used, 
and  the  other  will  disappear."  This  question  begging 
assertion  assumes  what  is  to  be  proved,  namely,  that  a 
cheaper  metal  exists  under  bimetallism.  This  assertion, 
moreover,  embodies  the  very  principle  which  would  pre- 


Money  Standards  265 

vent  the  metals  from  separating  in  purchasing  power  at 
the  legal  ratio.  W.  S.  Jevons,  who  justly  ranks  as  one  of 
the  two  or  three  most  brilliant  economists  England  has 
produced,  understood  well  the  compensatory  principle,  yet 
he  was  a  monometallist.  His  objection  to  bimetallism  is 
based  upon  the  belief  that  there  is  a  strong  prejudice 
against  silver.  In  his  well-known  work,  Money  and  Bank- 
ing, Horace  White  expresses  the  same  opinion.  If  silver 
were  as  desirable,  he  thinks,  it  would  be  put  on  an  equal 
footing  with  gold.  "Even  the  most  elaborate  system  of 
exchanges  through  banks  and  clearing-houses  leaves  a 
residuum  of  payments  to  be  made  by  the  transfer  of  metal, 
and  here  the  question  of  weight  becomes  decisive.  A  bank 
which  has  to  receive  $1,000,000  of  metal  will  always  pre- 
fer, say,  4,000  pounds  of  gold  rather  than  140,000  pounds 
of  silver.  It  can  afford  to  pay  a  premium  for  gold  equal 
to  the  difference  in  the  cost  of  handling  and  storing  the 
two  masses.  The  earliest  sign  of  a  premium  on  gold, 
after  a  bimetallic  agreement  had  been  made,  would  render 
the  agreement  itself  inoperative."  1 

No  one  has  ever  proposed  such  a  ratio  as  that  here 
assumed,  and  nothing  is  proved  by  an  argument  based 
upon  a  single  and  minor  function  of  money.  Gold  will 
serve  better  in  some  functions  and  silver  in  others.  Both 
will  serve  alike  for  bank  deposits;  certificates  backed  by 
silver  would  be  no  less  desirable  than  those  backed  by 
gold.  If  gold  be  more  desirable  to  settle  trade  balances 
with  gold-standard  countries,  silver  will  be  more  desirable 
to  settle  these  balances  with  silver-standard  countries.  If 
a  silver  dollar  is  inconvenient  because  it  is  too  large,  a  gold 
dollar  is  inconvenient  because  it  is  too  small. 

1  Money  and  Banking,  third  ed.,  pp.  76-77. 


266  Introduction  to  Economics 

There  is  no  natural  "preference  of  mankind  for  gold." 
A  large  portion  of  the  world  is  on  the  silver  standard,  a 
number  of  countries  since  1893  having  changed  from  the 
silver  to  the  gold  standard.  They  changed,  not  because 
of  a  natural  preference  for  gold,  but  because  of  their  com- 
mercial relations  with  the  gold-using  countries  of  the 
United  States  and  Europe.  The  prejudice,  if  such  it  be, 
in  most  of  these  countries  is  against  gold,  for,  although 
virtually  forced  to  the  gold  standard,  silver  is  the  only 
money  used  in  circulation.  It  is  found  difficult  "to  edu- 
cate these  peoples  to  the  use  of  gold." 

12.  Historical  Summary. — Space  will  permit  no  more 
than  the  briefest  outline  of  American  monetary  history. 
The  great  financier,  Alexander  Hamilton,  was  the  first 
secretary  of  the  treasury.  He  found  the  people  thinking 
in  terms  of  English  money,  but  really  using  a  medley  of 
coins — Spanish,  Mexican,  and  others.  He  weighed  the 
situation  as  best  he  could  in  this  and  other  countries  in 
order  to  strike  the  proper  ratio  between  gold  and  silver. 
Upon  finding  the  ratio  to  be  about  15 :  1,  he  recommended 
the  bimetallic  standard  at  this  ratio  to  Congress.  Con- 
gress trusted  the  judgment  of  Hamilton  and  gave  his 
report  the  form  of  law  in  1792.  Thus  America  began  with 
a  bimetallic  standard  of  15:1,  the  gold  dollar  containing 
24^  grains  and  the  silver  dollar  containing  371^  grains. 

Difficulty  arose  ;  the  new  silver  dollar  slightly  under- 
weighed  the  Mexican  and  Spanish  dollars  which  were  in 
circulation.  They  passed  in  trade  for  the  same  value,  so 
money  brokers  bought  up  the  new  coins  and  exported  them 
to  the  Spanish  colonies  in  exchange,  and  at  1  per  cent 
profit,  for  old  coins.  The  latter  were  brought  back  and 
offered  at  our  mint  for  new  dollars,  and  again  the  rounds 


Money  Standards  267 

of  exchange  would  be  made,  thus  "forming  an  endless 
chain."  President  Jefferson  put  a  stop  to  their  coinage 
in  1806,  when  he  ordered  the  mint  to  strike  no  more 
silver  dollars,  and  this  act  remained  in  force  thirty  years. 
There  was  enough  silver  left  in  circulation,  mostly  Span 
ish  and  Mexican,  to  bring  our  first  experience  to  failure. 
This  cheaper  metal  drove  gold  from  circulation. 

The  next  important  date  is  1834,  for  in  that  year  a  new 
coinage  act  was  passed,  and  a  new  ratio  of  16  :  1  between 
the  metals  was  chosen.  This  is  sometimes  called  the 
"Gold  Bill";  it  did  not  disturb  the  bullion  content  of  the 
silver  dollar,  but  reduced  the  bullion  content  in  gold  coins 
some  7  per  cent.  This  made  gold  coin  slightly  inferior  to 
silver  and  Gresham's  law  played  its  part  expelling  the  sil- 
ver. This  law  operated  slowly  at  first,  but  later  its  opera- 
tion was  hastened  by  the  production  of  Russian  gold-mines 
about  1840  and  by  the  extraordinary  discoveries  of  gold 
in  California  and  Australia  in  1848-51.  An  increase  in 
the  supply  of  gold,  never  before  equalled  in  the  history  of 
the  precious  metals,  lowered  the  purchasing  power  of  that 
metal  and  hastened  the  expulsion  of  silver  from  the 
market. 

Creditors  declared  the  law  unjust,  for  it  lowered  the 
bullion  content  of  coins  which  they  were  compelled  to 
accept  in  payment  of  debts  previously  contracted.  These 
objections  were  easily  disposed  of,  because  gold  had  not 
been  in  circulation  and,  therefore,  no  debts  had  been  con- 
tracted in  terms  of  it.  Moreover,  prices  were  declining 
and  the  purchasing  power  of  money  remained  about  the 
same. 

The  next  significant  date  was  1853.  This  act  gave  us  for 
the  first  time  a  settled  money  of  our  own.     We  had  in  cir- 


268  Introduction  to  Economics 

culation  no  silver  dollars  of  our  minting  since  President 
Jefferson's  order  of  1806  to  stop  their  coinage.  Smaller  sil- 
ver coins  were  of  full  weight  and  were  driven  out  by  light- 
weight foreign  coins.  The  Act  of  1853  reduced  the- bullion 
content  of  minor  coins  which  ever  since  have  remained  in 
circulation.  The  coinage  of  silver  "change"  was  limited, 
otherwise  we  should  have  gone  to  a  silver  basis,  and  our 
hard  money  would  have  consisted  entirely  of  small 
"change."  This  law  was  followed  by  an  Act  (1857)  deny- 
ing legal  tender  to  foreign  coins. 

The  Act  of  1873  gave  the  sanction  of  law  to  the  single 
gold  standard,  and  stopped  the  coinage  of  the  standard 
silver  dollar,  making  it  legal  tender  to  only  five  dollars. 
Little  did  the  people  care  about  this  restriction  on  the  silver 
dollar,  for  "to  Americans  it  was  an  unknown  coin."  Nor 
were  the  people  enthusiastic  concerning  the  gold  standard, 
for,  excepting  in  Oregon  and  California,  the  money  in  cir- 
culation consisted  of  greenbacks,  bank-notes,  and  silver 
"change."  Conditions  soon  changed,  however;  silver 
dropped  in  purchasing  power;  had  we  kept  bimetallism, 
silver  would  have  become  the  money  of  the  country.  The 
silver  interests  branded  the  act  "the  crime  of  1873."  Con- 
tentions arose  which  led  to  the  next  important  measure. 

The  Bland-Allison  Act  of  1877  was  a  compromise  mea- 
sure, providing  for  the  purchase  and  coinage  of  not  less 
than  $2,000,000  worth  nor  more  than  $4,000,000  worth  of 
silver  each  month.  The  bill  passed  over  the  veto  of  Presi- 
dent Hayes  and  became  law  in  1878.  In  1890  it  was  re- 
pealed when  the  Sherman  Act  took  its  place. 

The  Sherman  Act  was  passed  in  1890  and  repealed  three 
years  later.  It  provided  for  an  indefinite  amount  of  legal- 
tender  notes  for  the  purchase  of  silver  bullion.     It  was  a 


Money  Standards  269 

party  measure;  not  a  Democrat  voted  for  it  nor  a  Repub- 
lican against  it  in  either  House  of  Congress. 

The  only  restriction  on  the  rate  of  this  note  issue  was 
that  a  sum  should  be  issued  necessary  to  buy  4,500,000 
ounces  of  silver  each  month  at  its  market  ratio.  About 
$156,000,000  notes  were  issued.  Being  legal  tender,  they 
were,  although  redeemable,  in  effect  a  fresh  and  unlimited 
issue  of  greenbacks.  Inflation  followed,  the  gold  standard 
was  seriously  threatened,  and  the  panic  of  1893  followed. 

13.  A  summary  review  of  the  events  following  the 
passage  of  the  Sherman  Act  in  1890  will  be  found  instruc- 
tive. The  act  led  to  the  issue  of  $156,000,000  new  trea- 
sury notes  within  three  years,  and  to  the  exportation  of 
$160,000,000  worth  of  gold  in  the  same  period.  In  1893, 
therefore,  the  country  held  at  least  $150,000,000  less  gold 
than  it  would  have  had  if  the  Sherman  Act  had  not  been 
passed;  the  gold  reserve,  while  the  act  was  in  force,  de- 
clined from  $184,000,000  to  $84,000,000  (October,  1893). 
The  depression  following  the  panic  of  1893  was  accompa- 
nied by  a  shrinkage  in  the  need  for  currency,  while  at  the 
same  time  continuous  inflation  was  resulting  from  the 
treasury  deficit,  the  excess  of  expenditures  from  July  1, 
1893,  to  December  1,  1895,  amounting  to  $130,000,000. 
Continuous  inflation  gave  rise  to  a  continuous  demand  for 
gold  for  export.  The  treasury,  having  lost  most  of  its 
gold  during  the  preceding  three  years,  was  obliged  within 
three  years  to  add  $262,000,000  to  the  funded  debt,  receiv- 
ing in  cash  thereby  $293 ,000,000. "l  During  the  seven 
years  1890  to  1896,  inclusive,  the  total  exports  of  gold  ex- 
ceeded the  total  imports  by  $273,160,658. 

The  "limping  standard"  is  a  name  applied  to  a  situation 
Johnson's  Money  and  Currency,  revised  ed.,  pp.  358-359. 


270  Introduction  to  Economics 

which  arose  in  France,  Germany,  and  the  United  States 
when  these  nations  surrendered  the  free  and  unlimited 
coinage  of  silver.  The  mints  were  closed  to  silver,  and 
thereby  the  demand  for  silver  was  lowered;  but  the  silver 
coins  were  neither  recalled  from  circulation  nor  made 
redeemable  in  gold.  Although  the  bullion  in  a  silver  dol- 
lar was  worth  much  less  than  the  bullion  content  of  a 
gold  dollar,  yet,  being  limited  in  issue,  it  hobbled  along  at 
the  same  purchasing  power  of  its  stronger  associate. 

Since  there  is  no  free  coinage,  new  silver  supplies  cannot 
become  money  and  thus  increase  the  supply  of  money,  or, 
what  is  the  same,  lower  its  purchasing  power.  The  coin- 
age of  incoming  gold  supplies  is  not  so  restricted,  and  the 
demand  for  money  remaining  the  same,  additional  sup- 
plies of  gold  coins  tend  to  lower  the  purchasing  power  of 
money.  Should  the  face  value  of  silver  coins  drop  below 
their  bullion  content,  such  coins  will  readily  find  their  way 
to  the  melting-pot.  Bullion  is  not  free  to  become  coin, 
but  coin  is  free  to  become  bullion. 

Were  there  a  sufficiency  of  money  in  the  form  of  silver, 
paper,  nickel,  or  copper  to  do  the  money-work,  it  would 
oust  gold  money.  But  the  limitation  of  such  moneys 
enables  gold  money  to  circulate.  Silver,  of  course,  did 
not  maintain  its  parity  with  gold  on  any  other  ground 
than  that  of  a  limitation  in  its  supply.  It  is  fiat  and  its 
purchasing  power  was  maintained,  as  in  the  case  of  the 
birch-bark  money  of  China,  upon  the  principle  set  forth 
in  discussing  the  "quantity  theory." 

The  limping  standard,  despite  the  opinion  of  competent 
writers  to  the  contrary,  passed  out  of  existence  in  this 
country  with  the  incoming  of  the  Sherman  Law  of  1890. 
According  to  the  letter  of  this  law,  silver  dollars  are  not 


Money  Standards  271 

redeemable  in  gold  on  demand.  "However,  in  ordinary 
times,  the  holder  has  no  difficulty  in  exchanging  them  for 
gold;  and  in  extraordinary  times,  if  non-redemption  should 
threaten  depreciation,  the  secretary  of  the  treasury  would 
be  obliged  to  redeem  them."  l  This  statement,  summariz- 
ing the  facts  of  the  subject,  shows  that  they  are  truly  re- 
deemable. 

The  primary  money  of  the  United  States  is  gold;  ours  is 
a  gold  standard,  the  value  attributed  to  all  money  other 
than  gold  rests  upon  the  confidence  of  the  holder,  that  he 
can  exchange  it  upon  demand  for  gold. 

14.  Free-Silver  Agitation  of  1896. — There  should  now  be 
no  doubt  that  a  well-established  system  of  international 
bimetallism  would  work;  this  is  confirmed  by  the  reason- 
ing on  the  subject,  and  it  has  been  proved  in  fact  in  every 
case  when  it  has  been  given  a  fair  trial.  It  would  steady 
prices  and  facilitate  international  commerce  and  the  nor- 
mal distribution  of  capital.  The  fluctuations  in  the  pro- 
duction of  the  single  metal — gold — make  it  a  very  imper- 
fect standard. 

Serious  objection  was  urged  against  the  single  gold 
standard  in  the  United  States  and  in  European  countries, 
prior  to  1896,  lest  the  supply  of  gold  would  prove  inade- 
quate to  satisfy  the  needs  of  all  gold  standard  countries. 
Gold  prices  fell  with  alarming  persistency,  and  with  ill 
effects  upon  the  business  temper  of  the  people.  When 
conditions  were  at  the  worst  (1896)  W.  J.  Bryan  came  forth 
with  a  radical  proposal  for  national  bimetallism  at  16:  1; 
he  was  nominated  for  the  presidency  and,  with  "free  sil- 
ver" as  a  paramount  issue,  was  given  nearly  one-half  of 
the  popular  vote  of  the  country.     The  bullion  in  a  silver 

1  Johnson's  Money  and  Currency,  revised  ed.,  p.  364. 


272  Introduction  to  Economics 

dollar,  at  the  time,  was  worth  about  fifty  cents,  and,  had 
the  United  States  alone  adopted  bimetallism,  the  effect 
would  have  been  a  shift  from  the  gold  to  a  silver  standard. 
The  Republicans  met  the  issue  with  a  vague  indorsement 
of  international  bimetallism;  but  this  indorsement  was  for 
political  effect  only,  because  all  informed  persons  knew 
that  the  European  nations  would  not  agree  to  it.  Both 
parties  favored  international  bimetallism,  and  both  knew 
it  to  be  impossible  of  accomplishment,  but  the  Democrats, 
rather  than  suffer  the  effects  of  the  limited  money  supply 
under  the  gold  standard,  were  willing  to  assume  the  risk 
of  national  bimetallism. 

But  after  1897  an  enlarged  supply  of  gold  caused  an  up- 
ward movement  in  gold  prices  which  has  continued  to  the 
present  time.  It  was  not  long  before  Mr.  Bryan  was  able 
to  remark  that  the  Republicans  wanted  the  gold  standard 
and  got  it,  and  the  Democrats  wanted  more  money  and  got 
it.     Both  got  what  they  wanted  and  both  should  be  happy. 

The  problem  has  changed  from  one  of  scarcity  to  one  of 
an  increasing  oversupply  of  money.  As  previously  noted, 
there  is  no  problem  in  uniformly  low  or  in  uniformly  high 
prices,  except  for  long  contracts  in  terms  of  money,  nor 
would  uniformly  rising  or  declining  prices  present  difficul- 
ties; the  problems  difficult  of  solution  arise  out  of  the  malad- 
justments occasioned  by  the  inequality  of  price  movements. 
Problems  we  now  have  a  plenty,  but  how  to  increase  the 
money  supply  is  not  one  of  them,  consequently  bimetallism 
is  for  the  time  a  dead  issue.  History  is  being  made  rapidly, 
however,  and  the  dead  issue  of  to-day  may  be  the  burning 
and  paramount  issue  of  to-morrow. 

15.  The  Gold  Standard  on  Trial.— Stability  stands  out 
as  the  single  most  important  feature  money  can  have.     If 


Money  Standards  273 

the  gold  standard  fails  it  will  fail  upon  the  ground  of  insta- 
bility. Gold  combines,  as  does  no  other  metal,  all  the 
features  necessary  for  the  making  of  money.  What  of 
the  prospects  of  its  stability  in  purchasing  power?  De- 
clining prices  prior  to  1897  threatened  the  continuance  of 
the  gold  standard,  as  have  rising  prices  since  that  date. 
The  history  of  the  subject  does  not  make  us  sanguine,  yet 
important  influences  are  becoming  active  which  may  steady 
gold  prices. 

It  is  argued  that  transition  to  the  gold  standard  bids 
fair  to  cover  the  whole  commercial  world  in  the  near  future, 
and  this  extensive  demand  will  arrest,  it  is  thought,  the 
rapidly  declining  purchasing  power  of  gold.  But  this 
argument  is  less  convincing  when  we  remember  that  a 
large  portion  of  the  earth,  including  important  money- 
using  countries,  have  within  the  last  few  years  substituted 
the  gold  for  the  silver  standard.  At  the  very  time  when 
the  gold  standard  was  becoming  securely  established  in 
these  countries,  gold  prices  have  made  the  most  rapid 
advances.  This  extensive  demand  has  been  more  than 
offset  by  increased  gold  production.  The  growth  of  the 
business  of  the  world,  bringing  about  an  expansion  of  ex- 
change transactions,  must  mean  that  growing  demands 
will  be  made  for  money.  Supply  being  aside,  the  greater 
the  demand  for  money  the  lower  will  be  general  prices. 

Let  us  inquire  into  the  prospects  on  the  side  of  supply. 
From  present  indications  the  supply  will  be  sufficiently 
large.  The  production  of  gold,  like  that  of  any  other 
manufacturing  industry,  has  a  precision  made  possible  by 
the  inventions  and  processes  now  used.  Costs  can  be 
accurately  estimated  and  output  normally  regulated  to 
demand.     Costs  promise  to  be  the  chief  limiting  agency 


274  Introduction  to  Economics 

of  the  supply.  And  these  costs  of  production  will  tend  to 
be  automatically  regulated  by  the  purchasing  power  of 
gold.  The  various  items  of  cost,  such  as  wages,  tools, 
and  machinery,  will  go  up  as  the  purchasing  power  of  gold 
goes  down.  The  decline  in  the  purchasing  power  of  gold 
will  arrest  its  production  at  the  point  where  the  cost  of 
production  equals  the  worth  of  the  gold  produced.  New 
gold  discoveries  aside,  we  may  expect  a  more  stable  gold 
output  throughout  the  next  decade  than  we  have  had  dur- 
ing the  half-century  now  ending. 

16.  Different  Standards  Defined. — All  writers  on  money 
agree,  if  in  little  else,  upon  the  one  fact  that  the  money 
standard  should  be  stable.  Their  reasoning  teaches  them, 
in  the  first  place,  and  the  history  of  previous  experiences 
confirms  their  reasoning,  that  no  one  commodity,  gold  or 
other,  can  maintain  perfect  stability  in  the  purchasing 
power  of  money. 

The  multiple  or  tabular  standard  was  the  first  suggestion 
made  to  remedy  the  instability  of  the  value  of  money. 
This  suggestion  attempts  to  answer  the  question:  How 
maintain  a  uniform  purchasing  power  over  goods?  If 
Smith  lends  Jones  $500,  the  loan  in  reality  amounts  to  the 
command  over  a  certain  quantity  of  goods  which  that  sum 
of  money  would  buy  at  the  time  of  the  loan.  The  tabular 
(multiple)  standard  provides  that  Jones  shall  return  to 
Smith  the  same  purchasing  power  borrowed,  be  that  $500 
more  or  less.  But  how  are  debtors  and  creditors  to  de- 
termine the  equivalence  of  the  purchasing  power  borrowed 
and  returned?  This  suggests  the  necessity  of  a  govern- 
ment commission  which  shall  make  frequent  estimates  of 
price  changes,  and  with  such  estimates  in  hand  it  will  be 
easy  to  calculate  the  amount  of  money  necessary  to  can- 


Money  Standards  275 

eel  a  loan.  If,  during  the  life  of  the  loan  index  numbers 
should  rise  from  ioo  to  no,  Jones  would  return  to  Smith 
not  $500  but  $550.  Or  if  the  index  of  prices  drop  to  90, 
Jones  would  return  the  same  purchasing  power  he  bor- 
rowed by  handing  back  $450  instead  of  $500. 

Other  writers  say  there  can  be  no  stability  with  respect 
to  goods.  Changes  in  styles,  methods,  and  inventions 
make  the  expression  "command  over  a  certain  quantity 
of  goods"  difficult  of  interpretation.  Formerly  the  arti- 
cles of  common  necessity — and  such  articles  must  enter 
into  an  interpretation  of  the  purchasing  power  of  money- 
would  include  goods  now  obsolete.  Tallow  candles,  spin- 
ning-wheels, and  flint-lock  rifles  were  once  common  neces- 
sities; where  they  now  exist  they  hold  a  different  economic 
relationship.  Goods  have  but  the  one  purpose  of  gratify- 
ing desires;  justice,  therefore,  requires  not  an  equivalence 
in  command  over  a  certain  quantity  of  goods,  but  an 
equivalence  in,  to  use  an  awkward  expression,  desire-grati- 
fying power.  This  has  been  called,  but  erroneously  so, 
a  utility  standard.  It  is  worthy  of  no  further  considera- 
tion, in  that  it  is  impossible  of  attainment. 

Others  say:  "Let  us  have  the  labor  standard."  This  is 
based  upon  a  hodgepodge  of  theories  now  discarded.  Pay 
back  a  sum  of  money  which  will  buy  the  same  amount  of 
labor  as  the  money  borrowed  would  have  bought  at  the 
time  of  the  loan. 

The  commodity  standard  is  the  name  given  to  the  stand- 
ard now  in  use  throughout  the  civilized  world.  The 
world's  money  is  made  of  gold  and  silver;  long-time  con- 
tracts are  made  in  terms  of  gold  or  silver  money,  depend- 
ing upon  the  standard  under  which  they  are  made.  If 
one  borrows  $1,000  when  prices  are  low  and  pays  when 


276  Introduction  to  Economics 

prices  are  high,  he  pays  back  $1,000.  This  is  not  the  most 
just,  but  the  most  practical  standard,  and  is  universally 
accepted. 

The  compensated  dollar  has,  within  the  last  few  years, 
been  the  subject  of  numerous  articles  in  different  lan- 
guages. The  thoughtful  consideration  of  the  subject  and 
its  wide  acceptance  by  statesmen,  business  men,  and 
economists  are  due  to  the  very  able  and  attractive  manner 
in  which  it  has  been  presented  by  Professor  Irving  Fisher. 

This  plan  does  not  claim  to  be  ideal.  This  fact  alone 
entitles  it  to  discussion.  He  who  comes  forth  with  an 
"ideal  standard"  is  unworthy  of  being  heard,  for  in  the 
very  nature  of  things  such  a  standard  is  impossible.  Under 
this  plan  the  gold  standard  would  be  constantly  main- 
tained in  conformity  with  a  multiple  or  tabular  standard. 
A  tabular  standard,  as  pointed  out  a  moment  ago,  is  far 
from  ideal.  If  prices  go  up  we  cannot  say  whether  the 
worth  of  goods  has  gone  up,  or  the  purchasing  power  of 
money  down,  or  whether  both  of  these  phenomena  are 
causal.  Those  who  defend  the  idea  of  the  compensated 
dollar  do  not  allow  themselves  to  be  drawn  into  a  harangue 
over  the  tabular  standard,  accepting  this  standard  for  bet- 
ter or  for  worse;  they  say,  simply,  the  plan  is  to  vary  the 
weight  of  the  gold  dollar  or  other  unit  from  time  to  time 
in  such  a  way  as  to  maintain  always  substantially  the 
same  purchasing  power. 

There  would  be  no  recoinage  of  gold  money  from  time 
to  time.  It  is  suggested  that  all  circulating  gold  be  called 
in  and  paper  certificates  issued  therefor,  and  that  a  vary- 
ing quantum  of  gold  bullion  be  held  in  reserve  for  the 
redemption  of  these  certificates.  It  is  thought  that  such 
a  change  could  be  easily  made  because  we  now  use  paper, 


Money  Standards  277 

for  the  most  part,  rather  than  gold  coin.  Regardless  of 
its  changing  worth,  we  now  hold  23.22  grains  of  gold  per 
dollar,  back  of  a  certificate;  the  new  plan  would  not  define 
how  many  grains  of  gold  must  back  the  dollar;  it  would 
require  that  a  varying  amount  of  bullion  back  the  certifi- 
cate, this  amount  to  be  so  varied  as  to  keep  the  purchas- 
ing power  of  a  dollar  the  same  through  time.  The  dollar 
now  has  an  unvarying  bullion  content  and  a  varying  pur- 
chasing power;  it  would  then  have  an  unvarying  purchas- 
ing power  and  a  varying  bullion  content.  If  during  the 
year  the  exchange  power  of  a  unit  of  gold  diminish  one- 
half,  a  gold  certificate  could  be  redeemed  for  twice  the 
amount  of  gold  at  the  end  as  at  the  beginning  of  the  year. 
All  the  plans  given  for  improving  the  standard  have 
their  defenders,  but  the  gold  standard  is  here  to  stay,  so 
far  as  we  can  now  see,  indefinitely. 

17.  Exercises. — 1.  In  a  poor  community  there  is  little 
money.  Is  the  community  poor  because  there  is  little 
money  in  it,  or  is  there  little  money  because  the  community 
is  poor  ? 

2.  A  good  market  to  sell  in  is  a  poor  market  to  buy  in, 
and  a  good  market  to  buy  in  is  a  poor  market  to  sell  in. 
How  is  this  fact  related  to  the  movement  of  money  from 
one  nation  to  another?  What  limits  the  extent  of  the 
movement  of  money  from  one  place  to  another? 

3.  What  is  Gresham's  law?    When  will  it  not  work? 

4.  Define  bimetallism.  Explain  the  compensatory  prin- 
ciple. Would  you  vote  for  national  bimetallism  ?  For  in- 
ternational bimetallism  ? 

5.  Assume  that  in  1896  the  market  ratio  of  gold  to  silver 
was  exactly  32:1,  and  that  the  United  States  had  adopted 
bimetallism  at  a  ratio  of  16  :  1.  Would  both  gold  and  sil- 
ver coins  have  come  into  and  remained  in  circulation?  If 
not,  in  what  money  would  debts  have  been  paid  ?     Which 


278  Introduction  to  Economics 

money  would  have  become  the  standard?     What  would 
have  become  of  the  other? 

6.  Summarize  the  arguments  for  and  against  inter- 
national bimetallism. 

7.  Define  these  terms;  mint  ratio,  market  ratio,  gold 
points,  "bad  money,"  "good  money,"  inconvertible  paper 
money. 

8.  "Should  all  prices  rise  uniformly  or  decline  uniformly, 
no  one  would  be  either  benefited  or  injured."  Is  this 
true? 

9.  Because  prices  do  not  increase  uniformly  some  classes 
are  benefited  and  others  are  injured.  Is  this  true?  If  so, 
what  classes  are  injured  ?    And  what  classes  are  benefited  ? 

10.  Tell  what  occurred  at  each  of  the  following  dates  in 
the  monetary  history  of  the  United  States:  1792,  1806, 
1834,  1853,  1857,  1873,  1877,  1890. 

11.  Make  an  argument  either  for  or  against  the  idea  of 
the  compensated  dollar.  Would  it  work  with  respect  to 
foreign  exchange?     Why  or  why  not? 


CHAPTER   XIII 
CREDIT  AND  BANKING 

i.  Credit  as  a  substitute  for  money.  2.  All  classes  use  credit.  3.  Credit 
defined.  4.  The  basis  of  credit.  5.  Credit  facilitates  production.  6.  The 
danger  of  credit.  7.  The  general  and  limited  acceptability  of  credit  in- 
struments. 8.  Bank  credits.  9.  Banks  as  reservoirs  of  capital.  10.  De- 
posits. 11.  Deposits  lower  the  purchasing  power  of  money.  12.  Time 
deposits.  13.  Liabilities  and  assets.  14.  The  operations  of  a  bank.  15. 
The  value  of  a  bank's  liabilities.  16.  Capital  items.  17.  Reserves.  18. 
Other  assets.  19.  The  leading  safeguard  of  a  bank.  20.  The  agency  of 
clearing-houses.  21.  Payments  by  checks  between  different  communities. 
,22.  Bank-notes.     23.  Exercises. 

i.  Credit  as  a  Substitute  for  Money. — In  our  reasoning 
upon  the  law  of  substitution,  it  was  made  clear  that  when 
commodities  will  readily  substitute  for  each  other,  the 
prices  of  these  commodities  will  tend  to  be  uniform.  If 
two  kinds  of  building  material  will  supply  the  same  demand 
or  readily  substitute  for  each  other,  their  prices  will  vary 
but  little.  If  a  large  increase  in  supply  tends  to  diminish 
the  price  of  pork  at  the  same  time  that  a  shortage  in  pro- 
duction is  tending  to  increase  the  price  of  beef,  an  in- 
creased demand  for  the  former  will  arrest  its  decline,  while 
a  decreased  demand  for  the  latter  will  arrest  its  advance. 
The  two  are  competing  to  fill  the  same  demand  and  this 
competition  tends  to  level  their  prices. 

Credit  substitutes  directly  for  money;  in  performing  the 
same  function  both  supply  the  same  demand,  and  an  in- 
crease of  credit  affects  the  purchasing  power  of  a  dollar  no 
less  than  an  increase  in  the  supply  of  money  itself.     So 

close  is  the  relationship  between  money  and  credit  that  in 

279 


280  Introduction  to  Economics 

many  instances  they  come  to  perform  precisely  the  same 
functions;  here  their  identities  fuse  and  the  two  become 
one.  Bank-notes;  are  they  credit  instruments?  Yes,  they 
bear  the  promise  to  pay  to  the  bearer  on  demand.  Are 
they  money?  That  which  does  the  money -work  is  the 
money- thing,  and  this  work  they  do  in  full. 

Credit  liberates  wealth  when  it  substitutes  for  primary 
money.  An  isolated  community  worth  $100,000  can  enjoy 
but  $80,000  worth  of  necessities  and  conveniences  should 
it  be  compelled  to  set  aside  $20,000  in  gold  coin  to  facili- 
tate its  exchanges.  Could  it  substitute  credit  for  gold 
coin,  and  convert  its  gold  into  necessities,  its  well-being 
would  be  increased  to  the  extent  of  $20,000. 

2.  All  Classes  Use  Credit. — Formerly  the  debtor  class 
consisted  almost  entirely  of  the  poor,  who  were  forced  in 
times  of  stress  to  borrow  from  their  more  favored  brethren. 
To-day  the  debtor  class  consists,  for  the  most  part,  of  the 
wealthy  who  borrow  for  investments.  But  the  distinc- 
tion must  not  be  drawn  too  sharply,  for  all  classes  use 
credit. 

Improvident  working  men  spend  their  wages  before  they 
are  earned.  Always  dependent  upon  credit  stores,  they 
pay  extortionate  prices  to  be  carried  on  the  books.  The 
rule  of  these  stores  is  low  prices  for  cash  and  high  prices 
for  credit,  the  credit  prices  being  made  high  enough  to 
counterbalance  bad  debts.  Those  honest  enough  to  pay, 
pay  enough  to  square  the  account  of  the  dishonest  custo- 
mer. Improvidence,  as  a  cause  of  credit,  makes  the  com- 
mercial system  uncertain. 

A  very  poor  community  must  have  the  necessities  of 
life;  the  pressure  for  goods  causes  idle  money  in  the  drawer 
to   be  regarded  as  an  unnecessary   luxury.     So   its  cash 


Credit  and  Banking  281 

reserves  are  reduced  to  a  minimum;  they  resort  to  credit 
and  trust  to  luck  that  they  will  get  more  money  somehow 
when  it  is  needed. 

Provident  persons  starting  into  business  or  desiring  to 
enlarge  operations  will  have  little  money  in  reserve.  The 
need  of  funds  to  construct  large  productive  establishments 
may  require  more  money  than  is  in  circulation.  This 
necessity,  whether  for  purposes  of  consumption  or  of  pro- 
duction, will  lead  to  the  establishment  of  a  credit  system 
which  shall  serve  the  place  of  money. 

3.  Credit  Defined. — What  has  been  said  indicates  that 
credit  is  a  readily  acceptable  thing,  which  performs  the  es- 
sential function  of  money,  but  it  has  a  broader  application. 
If  we  speak  of  the  public  credit  of  Mexico,  we  have  in  mind 
the  ability  and  readiness  of  that  government  to  fulfil  its 
pecuniary  obligations.  Credit  is  trust  given  or  received; 
expectation  of  future  payment  for  property  transferred  or 
promises  given;  it  applies  to  individuals,  corporations,  and 
nations. 

Credit  is  used  at  times  to  signify  a  person's  ability  to 
contract  a  debt.  "A  good  pay  is  master  of  another  man's 
purse."  "A  good  way  to  make  debts  is  to  pay  them." 
William  Roscher,  a  German  economist,  said:  "Credit  is 
the  power  of  disposition  over  the  goods  of  another,  volun- 
tarily granted  in  consideration  of  the  mere  promise  of  the 
counter- value." 

A  more  accurate  statement  is  that  credit  refers  to  the 
obligation  which  exists  between  a  debtor  and  a  creditor 
during  the  interval  of  time  between  the  two  parts  of  a 
complete  act  of  exchange.  The  economist,  for  the  most 
part,  thinks  of  credit  simply  as  a  substitute  for  money. 

This  credit  obligation  may  or  may  not  be  legally  enforci- 


282  Introduction  to  Economics 

ble.  If  Smith  makes  a  note  to  Jones  for  $1,000  for  value 
received,  it  could  be  enforced  at  law;  but  if  Smith  and 
Jones  gamble,  the  obligation  or  credit  given  is  non-enforci- 
ble. 

Credit  is  to  be  distinguished  from  a  credit  instrument, 
the  latter  being  a  promise  to  pay  money  which  is  written 
or  printed  or  in  tangible  form. 

Credit  is  not  a  commodity;  it  creates  only  indirectly;  it 
is  merely  an  agency  of  transfer. 

4.  The  basis  of  credit  is  confidence.  There  must  be 
confidence  in  the  honor  ordinarily  of  the  debtor,  but  his 
personal  honor  is  not  enough;  there  must  also  be  confidence 
in  his  ability  to  pay.  Confidence  as  a  basis  of  credit  refers 
both  to  the  disposition  and  the  ability  to  pay. 

If  an  irresponsible  tramp  tender  his  note  the  maker  of 
the  note  has  neither  the  will  nor  the  ability  to  pay,  and  his 
note,  properly  speaking,  is  not  a  credit  instrument.  Credit 
must  have  reference  to  the  ability  of  the  persons  contract- 
ing debts.  This  fact  is  recognized  by  the  law,  for  the  con- 
tracts of  idiots  and,  in  many  cases  of  minors,  are  non- 
enforcible.  The  merchant  who  would  sell  "on  time"  to 
the  irresponsible  tramp  would  be  incapable  of  giving 
credit;  or  if  mentally  sound  he  would  be  merely  "taking 
a  chance." 

There  are  cases  where  credit  is  given  without  reference 
to  the  honor  of  the  debtor.  In  real-estate  transactions, 
for  instance,  the  record  in  the  county  clerk's  office  is  the 
only  worth-while  witness.  If  Smith  executes  a  land  con- 
tract to  sell  to  Jones  mortgaged  property,  Jones  must 
receive  it  according  to  contract  and  at  the  agreed  price, 
even  if  Smith  declared  it  to  be  free  from  obligation.  Here 
credit  is  involved  and  Jones  must  pay  even  if  against  his 


Credit  and  Banking  283 

will,  and  must  receive  the  real  estate,  even  though  Smith 
falsified. 

5.  Credit  Facilitates  Production. — It  is  common  knowl- 
edge that  people  who  borrow  money  on  credit  really  bor- 
row the  use  of  the  wealth  which  that  money  will  buy.  No 
one  pays  interest  on  borrowed  money  for  the  sake  of  keep- 
ing it;  on  the  contrary,  it  is  at  once  exchanged  for  ripe 
goods  or  for  productive  wealth. 

There  are  active  capitalists  who  productively  employ 
such  means  as  they  may  have  or  may  borrow;  there  are 
also  passive  capitalists — women,  children,  retired  business 
men — who,  having  no  productive  use  for  their  means,  loan 
at  interest  to  active  capitalists.  Credit  facilitates  the 
transmission  of  capital,  the  control  over  agencies  of  pro- 
duction, from  passive  to  active  capitalists.  Thus  credit 
serves  to  place  the  productive  agencies  of  the  community 
at  the  proper  place  and  in  the  most  enterprising  hands. 
By  the  transfer  of  productive  power  to  the  vigorous  and 
energetic  class  of  people,  public  welfare  is  promoted.  This 
makes  active  agencies  more  active  and  gives  motion  to 
idle  agencies.  It  concentrates  industries  and  makes  pos- 
sible the  advantages  of  large-scale  production. 

Credit,  then,  is  a  means  to  the  end  of  larger  production 
and  is,  therefore,  itself  productive.  All  the  numerous 
agencies,  facilitating  and  other,  which  co-operate  in  their 
organized  capacity  to  create  utilities,  are  productive.  No 
one  agent  alone  is  productive.  Land,  or  labor,  or  machin- 
ery, or  credit,  or  any  other  one  agent,  considered  separate 
and  apart  from  others,  is  non-productive.  A  productive 
agent  is  a  composite  unit,  and  every  essential  element  nec- 
essary to  compose  it  is  productive.  Credit  is  such  an  ele- 
ment and  it  is  idle  to  deny,  as  many  do,  its  productivity. 


284  Introduction  to  Economics 

6.  The  Danger  of  Credit. — Credit  ties  firm  to  firm  and 
business  to  business  throughout  the  industrial  life  of  the 
people.  No  misfortune  can  attend  one  branch  of  industry 
which  is  not  of  vital  concern  to  every  other.  For  instance : 
A  large  corporation  is  forced  into  bankruptcy;  its  out- 
standing obligations  are  large  and  numerous;  its  creditors 
have  reckoned  these  obligations  among  their  assets  and 
have  contracted  with  other  concerns  upon  the  strength  of 
these  assets;  but,  this  basis  of  credit  failing,  they  in  turn 
cannot  pay  their  debts  and  so  the  effects  of  the  one  big 
failure  are  passed  on.  The  failure  of  one  firm  gives  effect 
to  a  succession  of  failures  throughout  industry.  Its  effect 
has  been  compared  to  that  produced  when  a  stone  is  cast 
into  a  pond;  one  circular  wave  leads  to  another  until  the 
farthest  edges  of  the  pond  are  reached. 

Credit  is  most  sensitive;  being  based  upon  confidence,  it 
is  as  changeable  as  human  thought.  It  unites  with  money 
to  facilitate  exchanges  and  every  extension  of  it  is  an 
added  possibility  of  disaster,  for  if  any  considerable  por- 
tion of  the  intricate  mechanism  of  trade  should  fail,  con- 
fidence is  shaken.  An  impairment  of  confidence  results  in 
the  withdrawal  of  credit,  and  this  in  turn  causes  stringency 
in  the  money  market.  This  condition,  accompanied  by  a 
nervous  and  unreasonable  rush  on  the  part  of  each  to  save 
himself,  ruins  many  and  may  injure  all. 

Production  is  roundabout  and  is  becoming  more  so  with 
the  development  of  civilization.  If  the  primitive  man 
wanted  a  drink  of  water,  he  lay  down  by  the  brook  and 
drank  directly  from  it.  Later  on  he  made  use  of  a  crude 
receptacle  which  we  may  call  an  economic  good  with  an 
indirect  use.  The  water  was  no  longer  attained  directly, 
but    indirectly    through    the    agency    of    the    receptacle. 


Credit  and  Banking  285 

Should  the  average  city-dweller  trace  the  whole  roundabout 
process  step  by  step  of  his  getting  a  drink  of  water,  he 
would  be  amazed  at  the  complexity.  The  water  is  ob- 
tained only  at  the  end  of  a  long  succession  of  technical 
steps — mining,  smelting,  shaping,  transporting,  merchan- 
dising, and  other.  This  indirect  or  roundabout  process  is 
the  most  effective  way  of  getting  what  we  desire,  but  it 
requires  time  to  obtain  thus  the  objects  of  desire.  The 
more  roundabout  the  process,  generally  speaking,  the 
longer  is  the  lapse  of  time  between  the  beginning  and  the 
end  of  the  productive  process.  Credit  facilitates  this  com- 
plicated process;  it  enables  probable  future  goods  to  ex- 
change against  those  actually  present;  it  provides  the 
basis  of  a  continuous  working  policy,  thus  giving  temporal 
solidarity  to  business.  At  the  same  time,  however,  it 
lengthens  the  forecast  which  producers  must  make  of  the 
market,  and  thereby  increases  the  uncertainties  of  time. 
Credit  further  increases  the  uncertainties  of  time,  because 
through  it  the  number  of  interests  involved  are  increased. 
In  his  Economic  Crises,  a  book  deserving  careful 
study,  E.  D.  Jones  writes:  "The  abuses  of  credit  may 
manifest  themselves  in  many  forms.  At  one  place  they 
may  centre  in  the  banking  policy,  at  another  in  joint-stock 
companies;  at  one  time  the  fault  may  lie  in  bankruptcy 
laws,  at  another  in  a  reckless  issue  of  paper  money.  The 
use  of  credit  is  particularly  dangerous  when  the  tone  of 
business  is  unusually  optimistic.  It  is  also  dangerous  in 
lines  of  trade  in  which  estimates  are  unusually  speculative 
and  results  are  uncertain.  The  history  of  mining,  inven- 
tion, and  foreign  trade  is  replete  with  failures  due  to  easy 
credit.  And  the  modern  growth  of  credit  has  for  the  first 
time  made  speculation  socially  dangerous."     And  further: 


286  Introduction  to  Economics 

"The  convulsions  of  modern  business  would  seem  to 
indicate  that  the  credit  structures  which  have  been  raised 
in  the  business  world  are  too  lofty  for  the  basis  of  integ- 
rity we  have  at  present  to  offer.  The  remedy  lies  at 
every  man's  door.  Civilization  cannot  merely  migrate 
from  country  to  country  as  it  has  done  in  the  past;  we 
must  learn  how  to  intensify  the  economic  and  social  bonds 
without  self-destruction  and  without  the  increase  of  those 
economic  wastes  of  which  crises  form  a  part." 

7.  The  General  and  Limited  Acceptability  of  Credit  In- 
struments.— A  credit  instrument  has  general  acceptability 
when  all  persons  in  a  country  accept  it  without  question 
in  payment  for  goods  and  services.  Such  an  instrument 
must  be  negotiable;  there  must  be  general  confidence  in 
its  maker;  it  must  be  difficult  to  counterfeit,  easy  to  recog- 
nize, and  in  convenient  denominations.  Notes  of  this 
character  are  issued  by  banks  and  governments;  if  non- 
interest  bearing,  they  serve  as  money,  whether  legal  ten- 
der or  not. 

A  credit  instrument  is  said  to  have  limited  acceptability 
when  it  will  serve  as  a  means  of  payment  only  within  a 
restricted  field.  A  non-negotiable  promissory  note  is  most 
limited  as  to  acceptability.  If  made  payable  to  order  or 
bearer,  it  is  negotiable  and  its  acceptability  is  broadened. 
Other  instruments  of  limited  acceptability  are  book  ac- 
counts, bills  of  exchange,  various  forms  of  bank  credit, 
and  emergency  currency  such  as  "pay  checks." 

All  such  instruments  are  based  on  confidence  in  the  in- 
dividual or  firm  which  makes  them,  and  since  the  maker 
is  not  generally  known,  confidence  in  his  promise  to  pay  is 
limited. 

During  the  panic  of  1893  confidence  was  at  a  minimum 


Credit  and  Banking  287 

and  little  personal  credit  was  accepted,  and  the  need  for 
money  to  take  the  place  of  credit  exceeded  the  available 
supply.  People  lost  confidence  in  one  another,  but  large 
corporations  were  able  to  maintain  the  people's  faith  in 
certain  localities.  The  corporations  issued  "pay  checks" 
as  a  sort  of  emergency  currency.  They  have  been  called 
"community  credit  money,"  but  one  should  not  speak  of 
a  credit  instrument  of  only  a  community  reputation  as 
money. 

8.  Bank  credits  form  by  far  the  most  important  form  of 
credit  and  have,  therefore,  a  most  significant  influence  on 
prices.  Banks  are  institutions  which  deal  in  credit;  they 
make  their  income  by  selling  their  credit  to  customers. 
This  credit  is  more  convenient  than  primary  money,  and 
is  so  universally  acceptable  as  to  become  the  common 
medium  of  exchange  in  the  business  world.  A  bank  sells 
its  credit  by  simply  giving  its  promise  to  pay.  The  writ- 
ten evidence  of  an  individual's  promise  to  pay  is  a  promis- 
sory note;  the  written  evidence  of  a  bank's  promise  to  pay 
takes  the  form  of  a  bank-note  or  an  entry  in  what  is  known 
as  a  "pass-book."  But  why  such  confidence  in  a  bank 
that  its  mere  promise  comes  to  serve  as  the  common 
medium  of  exchange  throughout  the  business  world  ?  This 
confidence  rests  upon  so  many  pillars  of  support  that  a 
mere  enumeration  of  them  becomes  tedious.  They  are: 
the  bank's  paid-up  capital;  its  surplus  and  undivided 
profits;  its  reputation  and  good-will;  the  character  of  its 
loans  and  securities  held;  the  liability  of  stockholders;  the 
prestige  of  its  officers,  directors,  and  stockholders;  and, 
finally,  the  people's  confidence  is  strongly  supported  by 
faith  in  the  control  and  inspection  by  expert  official  ex- 
aminers. 


288  Introduction  to  Economics 

Banks  perform  various  functions  useful  to  their  custom- 
ers; some  of  these  are  performed  by  institutions  other  than 
banks.  They  maintain  deposit  vaults,  change  money,  sell 
securities,  and  serve  as  trustees.  But  the  one  essential 
and  true  banking  function  is  that  of  dealing  in  credit. 

9.  Banks  as  Reservoirs  of  Capital. — A  bank  may  be 
likened  to  a  reservoir  from  which  capital  (purchasing 
power)  flows  in  the  form  of  credit.  Surplus  funds  flow 
into  the  bank  and  become  the  basis  of  credit  issues,  which 
flow  out  to  the  places  where  capital  is  needed.  Thus 
banks  become  equalizing  agencies  of  finance  throughout 
the  community.  Small  driblets  of  idle  capital  are  col- 
lected by  the  banks  and  consolidated  into  huge  funds  capa- 
ble of  meeting  the  demands  for  large  capital  on  the  part  of 
great  industrial  establishments.  In  this  way  the  banks 
put  idle  capital  to  work  and  they  arrange  capital  in  such 
volumes  that  it  can  work  most  effectively. 

10.  Deposits. — Individuals  might  retain  their  own  funds, 
might  disappoint  the  burglars  by  hiding  them  in  unsus- 
pected places,  or  at  enormous  expense  keep  burglar-proof 
vaults,  but  a  division  of  labor  is  better  which  allows  one 
man  to  make  it  his  business  to  provide  a  place  of  safe- 
keeping and  so  do  this  work  for  all.  Those  who  intrust 
their  funds  to  a  bank  are  called  depositors  and  the  funds 
so  intrusted  are  deposits.  The  bank  holds  itself  ready  to 
pay  the  depositor  at  any  moment,  or  "on  demand."  In- 
dividuals would  rather  leave  their  means  "on  deposit" 
than  to  bear  the  risk  and  inconvenience  of  carrying  them 
about.  Consequently,  even  the  most  wealthy  carry  little 
money  with  them;  they  carry  instead  the  right  to  draw 
money.  Thus  risks  and  inconvenience  are  reduced  to  a 
minimum. 


Credit  and  Banking  289 

But  the  money  deposited  is  small  in  comparison  with 
the  deposits  made  through  discounting.  A  simple  illus- 
tration will  show  how  deposits  are  thus  made.  A  mer- 
chant who  sells  on  time  furnishes  a  farmer  with  tools,  fer- 
tilizer, and  seed,  taking  in  exchange  his  note  for  $500, 
which  will  mature  four  months  hence,  when  he  sells  the 
crop.  The  merchant  cannot  exchange  this  note  to  dis- 
tant commercial  houses  for  goods,  as  such  houses  would 
not  take  the  note  of  a  man,  though  of  high  moral  honor 
and  financial  ability,  who  is  unknown  except  in  his  home 
community.  But  such  houses  make  it  a  practice  to  accept 
the  credit  of  banks.  The  merchant  wishing  to  use  in  his 
business  the  $500  called  for  in  the  note  will  wish  to  trade 
this  promissory  note  to  the  bank  for  its  generally  accepted 
credit.  He  indorses  this  note  and  presents  it  to  the  local 
banker,  who  (knowing  both  the  maker  and  indorser  to  be 
honest  and  able  to  pay,  and  knowing  further  the  power  of 
the  law  to  compel  payment)  is  willing  to  trade  the  credit 
of  his  bank  for  it.  Inasmuch  as  the  note  will  not  mature 
for  four  months  he  will  not  give  in  exchange  the  credit  of 
the  bank  to  the  full  face  value  of  the  note,  but  accepts  the 
instrument  at  its  present  worth  ($500  less  interest  for  four 
months).  The  merchant  is  now  at  liberty  to  take  his  pay 
for  the  note,  for  instance,  $490,  in  either  of  two  ways — he 
may  take  the  cash,  or  he  may  leave  it  with  the  bank  as  a 
deposit  and  take  away  a  pass-book  which  evidences  the 
deposit,  and  a  check-book  which  enables  him  to  draw  in 
such  amounts  and  at  such  times  as  he  finds  convenient. 
The  latter  is  the  usual  method  followed  in  this  country, 
therefore  in  discounting  a  customer's  note  the  bank  in- 
creases its  own  deposits.  What  does  this  illustration  show 
a  deposit  to  be?     From  the  standpoint  of  the  bank,  a 


290  Introduction  to  Economics 

deposit  is  the  bank's  promise  to  pay  money  to  a  person  or 
corporation.  From  the  standpoint  of  the  depositor,  a 
deposit  is  the  right  to  draw  upon  the  bank. 

In  this  illustration  the  discounted  note  becomes  the 
property  of  the  bank.  The  merchant,  though  called  a 
borrower,  has  sold  to  the  bank  his  right  to  secure  money  in 
the  future,  just  as  he  sold  agricultural  equipment  to  the 
farmer.  He  indorsed  the  note,  thus  promising  to  make  it 
good  just  as  he  guaranteed  the  plows  and  other  equipment 
sold  to  the  farmer.  What  did  the  bank  give  in  exchange? 
This  transaction  simply  involved  an  exchange  of  rights; 
the  bank  sold  the  merchant  a  right  to  draw  at  will  for  his 
right  to  a  future  income. 

No  new  principle  would  be  involved  in  case  the  mer- 
chant has  a  note,  made  by  himself,  discounted  at  the 
bank.  His  note  evidencing  the  right  to  collect  a  certain 
sum  of  money  in  the  future  is  sold  to  the  bank  in  exchange 
for  the  right  to  draw  on  demand. 

II.  Deposits  Lower  the  Purchasing  Power  of  Money. — 
Business  men  meet  their  obligations  for  the  most  part  by 
drawing  on  their  bank  accounts.  Professional  men  and 
the  wealthier  classes  avail  themselves  most  generally  of 
this  means  of  payment.  On  the  other  hand,  the  poorer 
classes  and,  for  the  most  part,  those  who  live  in  the  country 
districts  use  money.  Again,  bank  credit  is  used  in  case  of 
large  payments  and  money  is  used  by  all  classes  in  so- 
called  "petty  transactions."  It  is  both  convenient  and 
customary  to  use  money  and  bank  credit  in  transacting 
the  people's  business.  The  demands  for  each  are  fairly 
established  in  practice,  and  the  amounts  of  each  in  com- 
mon use  hold  a  more  or  less  constant  ratio  to  each  other. 
In  other  words,  there  is  a  rather  constant  ratio  of  money 


Credit  and  Banking  201 

in  circulation  to  money  in  the  form  of  deposits.  This 
means  simply  that  an  increase  in  the  supply  of  money 
causes  a  proportionate  increase  in  bank  deposits.  Com- 
pared with  these  deposits  the  bank  credits  (substitutes  for 
money)  issued  upon  them  are  many  times  larger.  Conse- 
quently deposits  have  the  effect  of  lowering  the  purchasing 
power  of  money  or  of  raising  prices. 

12.  Time  Deposits  are  carried  by  savings-banks,  as  well 
as  by  separate  departments  of  commercial  banks.  These 
deposits  are  not  drawn  (as  are  deposits  in  commercial 
banks)  on  demand.  Upon  making  a  time  deposit  the  cus- 
tomer agrees  not  to  draw  for  some  specified  minimum  time, 
or  until  a  certain  number  of  days  after  he  shall  have  noti- 
fied the  bank  of  his  intention  to  withdraw  funds.  Be- 
cause the  banker  knows  in  advance  when  withdrawals  will 
be  made  he  can  prudently  invest  a  large  portion  of  the 
funds  intrusted  to  his  safe-keeping.  There  is  no  danger  of 
a  "run"  upon  the  bank  in  times  of  panic.  He  has  to 
maintain  but  a  small  fraction  of  the  deposits  to  meet  the 
demands  of  his  customers  for  cash.  The  Federal  Reserve 
Act  of  19 13  requires  that  only  3  per  cent  shall  be  kept  as 
a  reserve  against  time  deposits.  The  depositor  receives 
interest  on  time  deposits  and  regards  them  as  investments 
and  not  as  demand  credit  available  for  current  cash  trans- 
actions. 

Demand  deposits  are  spoken  of  as  checking  accounts; 
they  are  payable  at  any  time  and  the  demand  for  payment 
is  made  by  the  personal  check  of  the  depositor. 

13.  Liabilities  and  Assets. — Thus  far  we  have  seen  that 
bank  discount  amounts  to  this:  the  bank  buys  the  right  to 
collect  a  specified  sum  of  money  at  a  certain  future  time, 
and  gives  in  exchange  its  promise  to  pay  on  demand  a  sum 


292  Introduction  to  Economics 

of  money  equal  to  the  present  worth  of  the  money  it  ac- 
quires the  right  to  collect.  A  liability  (debt)  is  that  which 
one  is  under  obligation  to  pay.  The  bank  has  a  right  to 
receive,  at  its  maturity,  the  face  value  of  a  note  which  it 
discounts;  there  is  a  corresponding  duty  to  pay  on  the 
part  of  the  debtor  or  maker  of  the  note.  That  which  is  a 
right  of  the  bank  is  a  debt  or  liability  of  the  debtor.  On 
the  other  hand,  the  depositor  has  a  right  to  receive  on 
demand  the  funds  deposited  at  the  bank;  this  right  on  the 
part  of  the  depositor  is  a  debt  or  liability  on  the  part  of 
the  bank.  The  liabilities  of  a  bank  embrace  its  total  in- 
debtedness to  stockholders,  note-holders,  and  depositors. 
But  in  return  for  every  liability  assumed  the  bank  gets 
something,  and  this  which  the  bank  receives  is  called  its 
assets.  The  bank  gets  as  much  as  it  owes  and  owes  as 
much  as  it  gets;  its  assets  and  liabilities  weigh  the  same — 
they  balance.  A  bank  is  a  corporation,  a  legal  person;  it 
is  unlike  a  natural  person  in  this :  it  can  own  no  more  than 
it  owes. 

14.  The  Operations  of  a  Bank. — We  have  said  that  a 
bank  is  a  legal  person,  a  corporation,  and  that  it  can  own 
neither  more  nor  less  than  it  owes.  This  may  be  seen 
when  the  liabilities  and  assets  of  a  bank  are  arranged  side 
by  side.  A  bank,  as  any  other  corporation,  must  have 
capital  with  which  to  begin  business.  Let  us  assume  that 
five  persons  agree  to  establish  a  bank,  that  they  secure  a 
charter,  and  subscribe  $50,000.  The  bank  will  be  capital- 
ized at  this  sum,  and  the  ownership  of  it  will  be  divided 
into  500  parts,  called  "shares,"  each  of  which  will  be 
worth  $100.  If  each  of  the  five  men  subscribed  $10,000, 
each  would  come  to  own  100  shares  of  stock.  When  this 
money  is  turned  over  to  the  bank,  it  owes  or  is  liable  to 


Credit  and  Banking 


293 


the  stockholders  for  it.  The  paid-in  capital  is  a  liability 
of  the  bank,  and  the  bank  holds  the  $50,000  cash  as  an 
asset  against  its  liability.     The  statement  stands  thus: 


Assets 

Liabilities 

Capital . . 

.  .  $50,000 

The  bank  cannot  do  business  without  real  estate,  furni- 
ture, and  fixtures,  which  it  buys  at  a  cost  of,  say,  $5,000. 
This  sum  will  be  deducted  from  cash,  leaving  the  state- 
ment thus: 


Assets 

Liabilities 

Real  estate,  furniture. 

.      5,000 

Capital . . 

$50,000 

$50,000 

$50,000 

Both  the  purpose  of  the  bank  and  its  obligation  to  the 
stockholders  require  it  to  earn  profits;  and,  since  it  is  an 
institution  which  deals  in  credit,  it  will  seek  to  convert  its 
idle  cash  into  interest-bearing  securities.  There  will  be 
in  the  community  a  number  of  merchants  and  other  busi- 
ness men  who  desire  bank  credit.  Their  customers  in 
payment  for  goods  have  made  over  to  these  business  men 
notes  varying  in  amounts  and  dates  of  maturity.  Suppose 
that  the  bank  is  offered  an  aggregate  of  $20,000  worth  of 
these  promissory  notes  (securities).  The  bank  will  dis- 
count these  in  the  manner  above  described.  Should  the 
average  time  for  their  maturity  be  90  days,  the  bank  will 
deduct  the  discount  of,   say,  $300  and  give  deposits  of 


294 


Introduction  to  Economics 


$19,700  for  the  notes.  The  value  of  the  notes  at  maturity 
would  be  $20,000,  but  the  depositors  are  willing  to  forego 
$300  for  the  present  right  to  draw  $19,700.  The  $300  dis- 
count becomes  a  liability,  under  the  item  "undivided 
profits,"  to  the  stockholders.  The  $20,000  worth  of  securi- 
ties are  the  property  of  the  bank  and  are  entered  among 
the  assets  under  the  item  of  "loans."  In  this  transaction 
there  appear  some  new  items  changing  the  statement  to 
read  thus: 


Assets 

Liabilities 

Cash 

Loans  (securities) 

.  $45,000 
. .  20,000 

Capital 

Undivided  profits .... 
Deposits 

.  .  $50,000 

300 

•    19,700 

Real  estate,  furniture. 

.      5,000 

$70,000 

$70,000 

15.  The  value  of  a  bank's  liabilities  must  rest  upon  the 
value  of  its  assets.  The  major  part  of  the  assets  consists 
of  the  liabilities  which  the  bank  holds  against  its  customers. 
These  liabilities  are  backed  in  part  by  the  houses,  land, 
and  other  wealth  of  these  customers,  and  they  may  also 
be  backed  in  part  by  the  liabilities  which  these  customers 
hold  against  other  persons.  But  these  in  turn  are  backed 
by  tangible  wealth.  So  we  may  say  the  ultimate  basis 
of  a  bank's  assets  is  the  real  wealth  of  the  community. 
The  bank  is  merely  an  agency  for  giving  the  quality  of 
liquid  currency  to  unsalable  forms  of  wealth.  One  may  be 
wealthy  yet  have  no  purchasing  power,  such  is  the  condi- 
tion of  an  owner  of  unsalable  land.  He  turns  to  the  bank 
for  aid,  offers  it  a  note  backed  by  his  land,  and  this  is  con- 
verted into  the  form  of  readily  acceptable  bank  credit. 


Credit  and   'Banking  295 

16.  Capital  Items.— A  bank  as  a  corporation  or  legal 
person  is  distinct  from  the  shareholders  who  own  it,  and 
intrust  their  funds  to  it.  To  the  shareholders  it  owes  the 
original  capital  received  from  them,  as  well  as  all  the  earn- 
ings of  the  capital.  It  is  understood,  however,  that  any 
claims  held  against  the  bank  by  shareholders  cannot  be 
enforced  until  after  all  other  creditors  are  paid  in  full. 
The  "capital"  item  represents  the  bank's  liability  to  its 
stockholders;  therefore  the  capital  is  what  is  left  after  all 
other  liabilities  are  subtracted  from  the  total  assets  of  the 
bank.  It  is  evident  that  the  value  represented  by  the 
"capital"  item  is  constantly  changing.  Bookkeepers,  how- 
ever, keep  the  "capital"  item  unchanged;  they  charac- 
terize any  increase  not  as  "capital,"  but  as  "surplus"  or 
"undivided  profits."  Why?  Because  bookkeeping  is  sim- 
plified by  keeping  the  capital  at  the  same  figure;  because 
the  history  of  a  bank's  net  capital  accumulations  is  shown 
at  a  glance  when  the  original  capital  is  kept  separate  from 
the  later  accumulations;  because,  finally,  the  certificates 
which  represent  the  stock  have  an  engraved  face  value 
which  cannot  be  changed  conveniently  to  keep  pace  with 
the  fluctuating  money  worth  of  the  stock. 

The  items  of  "surplus"  and  "undivided  profits"  are 
simply  bookkeeping  devices  for  recording  the  variations  of 
capital.  As  the  "capital"  is  maintained  at  the  same  fig- 
ure, so  bookkeepers  also  hold  the  item  of  "surplus"  at  the 
same  figure  for  considerable  periods  of  time.  The  main 
reason  for  this  is  simplicity.  How  can  this  be  done,  it  will 
be  asked,  since  the  additions  to  the  original  capital  must 
fluctuate  with  the  normal  operations  of  the  bank's  business  ? 
This  is  made  possible  by  the  creation  of  a  third  item,  also 
a  part  of  capital,  called  "undivided  profits."    This  item  con- 


296  Introduction  to  Economics 

sists  of  a  varying  amount  in  addition  to  surplus.  "  Capi- 
tal" (the  original  sum  put  in),  "surplus"  (an  accumulation 
of  earnings  maintained  in  round  numbers  for  considerable 
periods  of  time)  and  "undivided  profits"  (an  irregular  and 
varying  sum  in  addition  to  surplus),  are  but  three  parts  of 
one  and  the  same  liability  of  the  bank  to  its  stockholders. 
17.  Reserves. — He  is  a  poor  banker  who  holds  large  sur- 
pluses of  idle  cash.  Funds  must  be  loaned  at  interest, 
and  deposits  created  through  the  discount  of  notes  far  in 
excess  of  the  cash  which  a  bank  keeps  on  hand.  If  it  fails 
in  this,  a  bank  neither  serves  its  function  nor  makes  a 
reasonable  profit.  What  would  happen  if  all  these  deposits 
were  immediately  called  for  in  cash?  If  the  governor  did 
not  declare  a  legal  holiday  (as  governors  have  done  when 
banks  were  threatened  with  a  "run"),  the  bank  would 
become  insolvent.  Then,  is  it  not  dangerous  for  a  bank 
to  contract  obligations  beyond  its  cash  reserves?  This  is 
to  be  answered  in  the  negative.  Would  the  notes  which 
the  bank  has  discounted  maintain  its  solvency?  Legal 
insolvency  exists  when  a  bank's  cash  assets  are  insufficient 
to  meet  its  liabilities  as  they  fall  due.  The  demands  upon 
a  bank  are  for  cash  and  cannot  be  met  by  an  offer  of  even 
the  best  securities.  The  moment  a  bank  is  unable  to 
meet  the  demands  of  the  depositors  in  cash,  that  moment 
it  has  failed;  and  the  moment  a  depositor  has  to  accept 
securities  in  satisfaction  of  his  claim,  that  moment  begins 
a  division  of  the  property  of  the  bank  among  its  creditors. 
The  real  banking  reserve  consists  of  those  assets  of  the 
bank  which  are  cash  (ready  purchasing  power)  or  immedi- 
ately convertible  into  cash.  Such  assets  are  specie,  cash 
items  (demands  on  others  immediately  collectible  in  cash), 
and  legal-tender  notes. 


Credit  and  Banking  297 

To  return  to  the  above  question,  bankers  are  in  no  dan- 
ger who  increase  the  deposits  subject  to  call  far  beyond 
the  amount  of  the  reserves.  Skilful  bankers  so  order  their 
discounting  of  notes  as  to  have  a  more  or  less  regular  inflow 
of  money  with  the  maturity  of  these  notes.  Suppose  that 
a  banker  discounts  300  notes  a  month,  or  an  average  of  10 
each  day.  Should  all  these  mature  on  one  day,  the  banker 
would  be  embarrassed  with  surplus  and  idle  cash  for  a 
day  or  two;  he  would  have  to  carry  a  large  reserve  to  tide 
him  over  until  his  next  income  period,  thirty  days  hence. 
But  should  the  discounting  of  securities  be  so  ordered 
that  there  will  be  an  approximately  equal  number  of  ma- 
turities each  day,  fewer  idle  reserves  will  have  to  be  held, 
because  the  inflow  of  funds  to  the  bank  would  approxi- 
mately equal  that  of  the  outflow  from  the  bank.  The  de- 
mands on  reserves  run  more  or  less  steadily  from  day  to 
day  and  observing  banks  soon  learn  what  ratio  of  reserves 
to  deposits  to  maintain. 

The  proportion  of  reserves  to  demand  liabilities  is  weak- 
ened in  two  ways — by  an  increase  of  liabilities,  or  by  a 
decrease  of  cash.  In  a  conservative  bank  there  is  a  care- 
ful watch  kept  over  the  demand  liabilities  and  the  cash, 
so  that  they  are  maintained  at  a  ratio  well  above  the  dan- 
ger-line. In  an  unsafe  bank,  too  much  stress  is  laid  upon 
the  point  that  "idle  cash  is  a  loss,"  the  possibility  of  finan- 
cial storms  is  disregarded,  all  possible  sail  is  spread,  the 
reserves  are  imprudently  reduced  below  the  danger-line. 
In  behalf  of  depositors,  laws  have  been  made  to  define 
minimum  reserves  requirements. 

Under  the  national  banking  laws  of  the  United  States 
this  minimum  was  fixed  at  25  per  cent  for  city  banks  and 
15  per  cent  for  country  banks.     It  is  left  to  the  banker  to 


298  Introduction  to  Economics 

determine  how  much,  if  any,  may  be  required  in  addition 
to  this  minimum.  The  size  of  the  necessary  reserve  varies 
from  place  to  place;  generally  speaking,  it  is  larger  in  the 
city  than  in  the  country  districts. 

Payment  by  checks  do  not  necessarily  make  demands  on 
the  reserves  of  banks.  Smith,  Jones,  and  the  other  busi- 
ness men  of  the  community  are  customers  of  the  same 
bank,  and  when  they  make  their  payments  to  one  another 
through  checks  upon  the  bank,  these  credits  are  turned 
back  to  the  bank  for  deposit.  Smith  hands  to  Jones  his 
check  for  $100  in  payment  of  a  debt;  Jones  takes  this  to 
the  bank  for  deposit,  and  the  bookkeeper  deducts  $100 
from  Smith's  account,  adding  the  same  to  the  account  of 
Jones.  No  cash  is  required,  there  is  merely  bookkeeping. 
If  Smith  decides  to  pay  Jones  $100  cash,  he  will  withdraw 
this  amount  from  the  bank,  but  as  soon  as  it  is  received  by 
Jones  he  will  return  it  to  the  bank.  These  examples  are 
typical  of  the  ordinary  transactions  carried  on  through 
banks;  they  are  of  such  a  nature  that  banks  are  enabled  to 
keep  reserves  that  are  small  in  comparison  with  their  lia- 
bilities. 

18.  Other  Assets. — Banks  are  coming  more  and  more  to 
loan  on  collateral;  that  is,  borrowers  pledge  some  form  of 
salable  property  to  the  bank,  which  may  be  readily  con- 
verted into  cash  by  the  bank  in  case  the  loan  is  not  promptly 
paid.  Stocks  and  bonds  are  the  most  desirable  form  of 
collateral,  because  if  the  bank  is  embarrassed  for  funds, 
these  securities  may  be  sold  quickly  on  the  stock  exchanges. 
Banks,  especially  those  in  the  vicinity  of  stock  exchanges, 
carry  a  considerable  proportion  of  their  assets  in  the  form 
of  stock-exchange  collateral.  Loans  made  on  this  basis  are 
usually  payable  at  "call";  that  is,  no  definite  time  is  set 


Credit  and  Banking  290 

at  which  they  mature,  but  they  are  payable  at  any  time 
the  bank  demands  payment. 

Other  quick  assets,  of  growing  importance  in  American 
banking,  are  such  securities  as  government,  state,  and 
municipal  bonds.  English  banking-houses  will  go  so  far 
as  to  treat  consols  as  if  they  were  cash. 

"Outside  paper"  is  a  technical  name  given  by  a  bank  to 
the  promissory  notes  of  business  firms  which  are  not  among 
its  own  customers  and  depositors.  When  a  bank  has  sur- 
plus funds  over  and  above  the  requirements  of  its  clientele 
it  may  find  an  outlet  for  them  in  the  purchase  of  outside 
paper.  A  group  of  middlemen  called  note-brokers  make 
it  a  business  to  search  out  and  sell  to  banks  desiring  such 
paper.  This  practice  is  commendable  on  condition  that 
the  bank  knows  the  financial  standing  of  the  firms  backing 
this  paper,  because  it  has  the  effect  of  distributing  the 
risks  of  the  bank  over  a  broader  business  circle.  It  is  not 
well  for  me  bank  to  restrict  its  loans  to  a  few  customers  or 
firms,  for,  these  failing,  the  bank  fails.  It  is  better  not  to 
carry  all  the  eggs  in  one  basket. 

19.  The  Leading  Safeguard  of  a  Bank. — Real  insolvency 
means  that  an  institution  owes  more  than  it  is  worth. 
Legal  insolvency  is  reached  when  an  institution  is  not  able 
to  pay  on  demand,  although  its  assets  are  equal  to  its  lia- 
bilities. When  a  bank  receives  a  commercial  deposit  it 
agrees  to  pay  on  demand;  when  it  fails  in  this,  the  bank 
has  failed  despite  the  sufficiency  of  its  assets  in  forms  other 
than  cash.  While  a  bank's  failure  does  not  necessarily 
imply  that  it  is  really  insolvent,  yet  it  must  make  safe  its 
depositors.  The  leading  safeguard  of  a  bank  against  real 
insolvency  lies  in  the  strength  of  its  capital,  surplus,  and 
undivided  profits.     These  represent  the  stockholders'  in- 


300  Introduction  to  Economics 

terests  and  the  claims  of  all  other  creditors  of  a  bank  are 
prior  to  those  of  the  stockholders.  The  greater  the  ratio 
of  their  interests  to  those  of  the  other  creditors,  the  less  is 
the  danger  of  real  insolvency. 

But  the  standing  danger  which  threatens  the  safety  of 
a  bank  is  the  right  of  depositors  and  the  holders  of  its 
notes  to  demand  funds  at  any  instant.  Bankers  may  in- 
crease reserves  relative  to  liabilities  by  (i)  care  in  the  selec- 
tion of  securities  to  be  discounted;  (2)  so  raising  the  rate  of 
discount  as  to  discourage  borrowers;  (3)  refusing  to  renew 
loans  or  to  make  new  loans;  and  (4)  collecting  loans  sub- 
ject to  call. 

20.  The  Agency  of  Clearing-Houses. — Should  Smith  pat- 
ronize the  First  National  while  Jones  deposits  with  the 
Second  National  Bank  of  the  same  city,  they  could  still 
pay  each  other  by  means  of  checks  as  effectively  as  though 
both  deposited  in  the  same  bank.  If  both  carried  deposits 
in  the  same  bank,  a  check  paid  by  one  to  the  other  would 
mean  that  the  bookkeeper  would  simply  deduct  the  amount 
of  the  check  from  the  deposit  of  the  payer  and  add  the 
same  to  the  deposit  of  the  payee.  In  the  case  now  assumed 
the  transfer  of  the  check  would  be  effected  through  the 
agency  of  a  clearing-house.  Smith,  for  example,  hands 
Jones  a  check  or  order  on  the  First  National,  to  pay  Jones 
$100;  Jones  indorses  the  same,  making  it  payable  to  his 
bank  (the  Second  National),  which  in  payment  adds  $100 
to  his  deposit.  He  surrenders  his  title  to  the  check;  it  be- 
comes the  property  of  his  bank,  which  gives  Jones  in  ex- 
change a  right  to  draw  $100.  Now  the  First  National 
Bank  owes  the  Second  National  $100.  Throughout  the 
day  each  of  these  banks  has  collected  from  the  numerous 
business  men  of  the  city  a  large  number  of  checks  against 


Credit  and  Banking  301 

the  other.  Were  there  a  large  number  of  banks  in  the 
city,  they  would  accumulate  numerous  checks  against  one 
another.  These  checks  or  credits  are  sent  to  the  clearing- 
house, which  settles  the  accounts  between  banks  just  as  a 
bank  settles  accounts  between  customers.  Suppose  that 
the  First  and  Second  National  Banks  hold  equal  amounts 
against  each  other.  The  obligations  would  cancel  out. 
But  if  the  orders  were  in  favor  of  the  First  National  to  the 
extent  of  $1,000,  it  would  be  credited  with  the  surplus  and 
the  bank  or  banks  owing  this  would  be  debited  with  the 
deficiency.  The  aggregate  of  these  differences  over  a  con- 
siderable period  of  time  will  be  small.  By  paying  these 
small  differences  to  the  clearing-house,  there  will  be  but 
little  cash  used  in  transactions  which  would  otherwise  ag- 
gregate large  sums. 

21.  Payments  by  Checks  between  Different  Communi- 
ties.— Should  Smith  live  in  Hoboken  and  Jones  in  St. 
Joseph,  Louisiana,  they  could  still  pay  each  other  by 
means  of  bank  credit.  Smith  may  draw  a  check  on  his 
bank  in  Hoboken  and  send  it  to  Jones.  The  Hoboken 
bank  now  owes  Jones  $100.  Jones  indorses  the  check, 
takes  it  to  his  bank  in  St.  Joseph  in  exchange  for  a  corre- 
sponding sum  to  the  credit  of  his  deposit  account.  Now 
the  bank  in  Hoboken  owes  the  bank  in  St.  Joseph  $100. 
The  St.  Joseph  bank  indorses  it  and  sends  it  for  collection 
to  a  New  Orleans  bank  with  which  it  maintains  a  deposit. 
The  New  Orleans  bank  now  owns  the  check  against  the 
Hoboken  bank,  and  it  has  paid  for  it  by  simply  adding  a 
corresponding  sum  to  the  credit  of  the  deposit  account 
which  the  St.  Joseph  bank  carries  with  it.  The  New  Or- 
leans bank  carries  a  deposit  with  a  New  York  bank,  so  it 
indorses  the  check  to  the  New  York  bank.     The  New 


302  Introduction  to  Economics 

York  bank  buys  the  check  by  adding  a  corresponding  sum 
to  the  deposit  account  of  the  New  Orleans  bank.  The 
New  York  bank  now  owns  the  check,  and  sends  it  to  the 
clearing-house  in  New  York  for  collection  from  some  other 
New  York  bank,  with  which  the  Hoboken  bank  has  a 
deposit  account.  In  the  clearing-house  $100,  the  amount 
called  for  in  the  check,  is  added  to  the  account  of  the  bank 
presenting  the  check,  and  the  same  amount  is  deducted 
from  the  deposit  account  of  the  correspondent1  of  the 
Hoboken  bank.  This  correspondent  bank  deducts  $100 
from  the  deposit  account  of  the  Hoboken  bank,  and  sends 
the  check  to  the  Hoboken  bank,  which  deducts  $100 
from  the  deposit  account  of  the  customer,  Smith,  who 
originally  signed  it. 

22.  Bank-notes  are  credit  instruments  so  exchangeable 
that  they  do  the  work  of  money  and  are,  therefore,  to  be 
classed  among  the  forms  of  money.  They  are  so  conve- 
nient that  they  take  the  place  of  metallic  money  in  many 
cases,  and  thus  lessen  the  amount  of  it  used  in  effecting 
exchanges.  A  bank-note  is  simply  a  promissory  note 
issued  by  the  bank.  The  holder  of  a  note  has  a  right  at 
any  time  to  demand  payment  by  the  bank,  and  the  bank's 
obligation  to  a  note-holder  is  not  unlike  its  obligations  to 
a  depositor. 

23.  Exercises. — 1.  "The  basis  of  credit  is  found  in  the 
tangible  wealth  of  the  world."  Explain.  "The  basis  of 
credit  is  confidence."    Are  these  statements  contradictory? 

2.  What  effect  will  an  increase  in  the  supply  of  cotton 
have  upon  the  demand  for  woollens?  What  effect  would 
an  expansion  of  credit  have  upon  the  purchasing  power  of 

1  When  one  bank  carries  a  deposit  account  in  another  they  are  called 
"  correspondent  "  banks. 


Credit  and  Banking  303 

money?     What  economic  principle  is  suggested  by  these 
two  questions? 

3.  Point  out  the  dangers  connected  with  credit  in  the 
modern  business  world. 

4.  Why  will  bank  credit  substitute  for  money  more 
readily  than  will  the  credit  of  a  good  citizen  ? 

5.  How  may  deposits  be  made  in  a  bank?  Describe  in 
detail  how  deposits  are  made  through  discounting. 

6.  What  effect  do  deposits  have  upon  the  purchasing 
power  of  money? 

7.  "A  bank  statement  is  a  summary  of  the  bank's  assets 
and  liabilities. 

"(a)  The  assets  and  liabilities  are  always  exactly  equal. 
How  do  you  account  for  this  ? 

"(b)  If  the  assets  and  liabilities  are  always  equal,  how 
can  the  statement  indicate  the  strength  of  the  bank  ? 

"(c)  If  you  deposit  $100  in  gold,  does  this  affect  the 
bank's  assets?  Its  liabilities?  Explain.  Answer  similar 
questions  assuming  the  deposit  to  be  in  the  form  of  a  $100 
check  on  this  bank;  assume  it  to  arise  from  your  giving 
your  note  for  $100  to  the  bank?"  (Hayes.) 

8.  "(a)  Why  is  it  that  for  'every  asset  there  is  a  lia- 
bility?' ' 

"(b)  If  men  in  organizing  a  bank  put  in  $20,000  in  gold, 
the  statement  will  then  stand:  Assets,  cash,  $20,000;  lia- 
bilities, capital  stock  $20,000.     Why  is  capital  a  liability? 

"(c)  How  will  the  statement  be  affected  if  $10,000  is 
spent  for  a  site  and  building? 

"(d)  If  Mr.  X  deposits  $200  in  gold? 

"(e)   If  Y  cashes  a  $50  check  drawn  by  X? 

"(f)  If  Z  opens  an  account  by  depositing  a  $100  check 
written  by  X? 

"(g)  If  Z,  wishing  to  borrow,  gives  his  note  for  $300  to 
the  bank  and  has  this  amount,  less  $2.45  interest,  deposited 
to  his  account? 

"(h)  If  the  bank  spends  $1,000  for  bonds? 

"(i)    If  the  bonds  are  later  sold  for  $1,100? 

"(j)    If  Z  pays  his  note  at  maturity?"     (Hayes.) 


304  Introduction  to  Economics 

g.  After  the  following  operations,  how  would  you  ar- 
range the  several  items  under  liabilities  and  assets?  The 
bank  begins  with  a  paid-up  capital  of  $150,000  and  has  a 
surplus  of  $30,000.  It  discounts  for  customers  $300,000  of 
four  months'  notes,  and  bills  receivable  at  6  per  cent,  the 
borrowers  take  one-third  of  the  proceeds  in  cash  and  leave 
two-thirds  on  deposit.  Customers  deposit  $50,000  in  cash, 
$25,000  in  checks  drawn  on  this  bank,  and  $25,000  in  checks 
drawn  on  other  banks. 


CHAPTER   XIV 

BANKING  LEGISLATION  IN  THE 
UNITED   STATES 

i.  Introductory.  2.  Centralized  banking.  3.  The  Bank  of  France. 
4.  Banking  prior  to  National  Banks.  5.  The  free  banking  system  of 
New  York.  6.  The  National  Bank  act.  7.  Provisions  of  the  act.  8.  De- 
fects of  the  system.  9.  Decentralization  of  banking.  10.  Inelasticity  of 
credit,  n.  Distribution  of  banking  facilities.  12.  Banking  and  foreign 
trade.  13.  New  system  demanded.  14.  The  Federal  Reserve  act. 
15.  The  Federal  Reserve  Board.  16.  The  reserve  banks.  17.  Federal  Re- 
serve notes.  18.  Reserves  of  Federal  Reserve  banks.  19.  Reserves  in 
member  banks.     20.  Noteworthy  features  of  the  law.     21.  Exercises. 

i.  Introductory.  The  function  of  banks,  as  well  as  their 
operations,  have  been  pointed  out  in  the  chapter  on  "Credit 
and  Banking."  In  a  great  commercial  community  these 
functions  reach  beyond  the  welfare  of  individual  customers; 
they  are  national  and  international  in  scope.  Banks  are 
the  agencies  through  which  currency  systems  operate.  In 
proportion  to  their  ability  to  distribute  properly,  to  expand 
and  contract  the  currency  as  need  arises,  to  make  their  ser- 
vices readily  available  to  all  classes,  agricultural  and  other, 
they  do  their  work  well  or  ill.  Coins  cannot  be  struck  and 
recalled  to  meet  the  varying  contractions  and  expansions  of 
business,  but  some  kind  of  elasticity  of  currency  is  neces- 
sary to  meet  the  ups  and  downs  in  the  money  demand. 
This  elasticity  is  to  be  found  in  bank  credit,  through  the 
expansion  and  contraction  of  either  bank-notes  or  deposits. 
Notes  may  be  issued  by  numerous  and  competing  banks, 
or  they  may  be  issued  by  one  bank  or  under  one  central 
supervision. 

305 


306  Introduction  to  Economics 

2.  Centralized  Banking. — Prior  to  the  Civil  War  there 
were  different  kinds  of  banks  which  issued  notes.  These 
notes  were  easily  put  into  circulation;  they  passed  as 
money,  though  not  always  at  par;  their  redemption  at  the 
banks  was  postponed,  for  certain  banks  evaded  their  re- 
demption when  called  upon,  and  they  continued  to  pass 
from  hand  to  hand;  reckless  issues  led  many  banks  to 
collapse.  This  sad  experience  led  to  the  advocacy  of  a  uni- 
fied control  of  note  issues,  but  as  a  "let  alone"  policy  pre- 
vailed, a  decentralized  note  issue  accompanied  it.  Decen- 
tralized note  issues  in  Scotland,  England,  and  the  United 
States  led  to  recurrent  bank  failures  during  the  first  half  of 
the  nineteenth  century. 

On  the  European  Continent  a  different  and  more  praise- 
worthy experience  is  recorded.  There  the  issue  of  notes 
has  been  regarded  as  a  public  function,  and  generally  has 
been  permitted  only  by  institutions  connected  with  or 
supervised  by  the  governments. 

Two  policies  have  taken  root:  (i)  Decentralization,  mani- 
fold note  issue,  government  supervision,  and  (2)  centraliza- 
tion and  quasi-public  note  issues. 

Typical  of  the  latter  policy  are  the  three  noteworthy 
central  banks:  the  Bank  of  France,  the  Bank  of  England, 
the  Reichsbank  of  Germany.  These  institutions  are  not 
alike  in  all  respects,  but  they  have  one  lesson  in  common. 
Attention  will  be  given  here  only  to  the  Bank  of  France: 
It  is  simple  in  operation,  and  will  show  the  functions  of  a 
central  bank. 

3.  The  Bank  of  France. — Although  the  Bank  of  France 
is  privately  owned,  and  pays  dividends  to  private  stock- 
holders, its  manager  is  appointed  by  the  French  Govern- 
ment, and  it  is  under  the  virtual  control  of  the  state. 


Banking  Legislation  in  the  United  States     307 

Nevertheless,  it  is  little  hampered  in  its  operations,  since 
there  is  no  special  regulation  of  its  banking  functions,  no 
separate  provision  for  the  safety  of  its  notes,  since  it  has 
a  monopoly  of  the  note  issue. 

Public  Duty:  The  Bank  of  France  is  the  fiscal  agent  of 
the  government,  keeps  the  public  funds,  administers  and 
records  the  public  debt,  and  lends  funds  to  the  govern- 
ment. Always,  in  time  of  need,  the  treasury  of  France 
turns  to  this  bank  for  advances.  Since  19 14  as  well  as 
after  1870,  the  services  of  the  bank  in  financing  the  govern- 
ment cannot  be  overestimated.  It  issues  notes  and  lends 
to  the  government.  So  large  was  the  issue  during  and 
after  the  war  of  1870-1,  that  it  was  decided  to  suspend 
specie  payments,  but  so  great  was  the  confidence  in  the 
bank's  power  and  willingness  to  meet  its  obligations  that 
no  depreciation  occurred  prior  to  the  date  of  redemption, 
1878.  That  was  a  period  of  enormous  note  issue,  yet  con- 
servative in  comparison  with  the  great  demand  for  cur- 
rency, and  this  conservatism  sustained  public  confidence. 

Specie  Reserve:  In  normal  times  this  bank,  relative  to 
its  demand  obligations,  carries  the  largest  reserve  of  any 
bank  in  the  world.  The  large  and  growing  specie  reserve 
is  composed  of  both  gold  and  silver — mostly  gold,  and  so 
the  bank  is  able  to  maintain  a  low  rate  of  bank  interest. 
Moreover,  this  large  reserve  is  never  in  danger  of  exhaus- 
tion, and  enables  the  bank  to  maintain  a  policy  of  low  and 
uniform  discount  rates.  It  changes  the  discount  rate  on 
the  average  about  once  a  year— from  1875  to  1908  there 
were  only  thirty-six  changes.  American  bankers  would 
object  to  holding  a  large  reserve  of  idle  specie,  but  the 
Bank  of  France  is  not  primarily  a  money-maker  for  its 
stockholders.     Its  main  purpose  is  to  render  the  best  pub- 


308  Introduction  to  Economics 

lie  service,  to  hold  the  government's  finances  to  impreg- 
nable strength.  Because  of  this  it  has  even  been  accused 
of  collecting  a  huge  war  reserve  in  this  form. 

Deposits:  There  is  little  deposit  checking  in  France;  the 
people  use  specie  and  bank-notes  almost  altogether.  The 
tendency  for  notes  to  remain  in  circulation  for  long  periods 
of  time,  together  with  the  fact  that  they  are  more  conve- 
nient than  hard  money,  causes  gold  to  flow  into  the  bank 
in  exchange  for  notes  and  to  remain  there.  Notes  are  not 
issued  in  small  denominations,  however — not  less  than  50 
francs,  few  less  than  100  francs — and  this  compels  the  use 
of  hard  money  for  petty  transactions.  The  money  system 
and  habit  of  the  people  are  such  that  the  average  per  capita 
use  of  money  is  very  large. 

Branch  Banking:  Provision  has  been  made  for  the  estab- 
lishment of  337  branches  of  the  central  bank.  By  the 
decree  of  1808  branches  were  established  plainly  with  the 
design  of  centralizing  the  banking  interests  of  the  empire 
under  the  lead  of  the  great  bank  in  Paris,  but  the  Bourbon 
ruler  in  18 17  and  18 18  closed  these  branches.  In  1882 
branches  were  again  established.  There  are  some  objec- 
tions to  these  branch  banks;  their  capital  is  allotted  by  the 
central  bank;  they  are  supervised  by  the  parent  bank  in 
Paris;  they  must  secure  special  permission  to  do  business 
with  other  banks;  their  rates  of  discount  are  determined, 
not  by  the  local  needs  where  they  are,  but  by  a  policy  fixed 
in  Paris;  their  directors  are  selected  by  the  governor  of  the 
bank;  the  real  authority  is  in  the  hands  of  a  manager 
appointed  by  the  government,  frequently  a  stranger,  and 
assisted  by  subordinates  sent  from  the  capital.  The  ob- 
jections to  branch  banking  in  the  United  States  are  that 
small  banks  fear  they  will  be  swallowed  up  by  the  large 


Banking  Legislation  in  the  United  States     309 

banks  in  New  York  City,  and  that  local  interests  will  be 
served  best  by  independent  local  banks.  Our  system  has 
advantages  over  the  rigid  uniformity  required  for  the  whole 
of  France.  That  system  lacks  adaptability  to  local  needs. 
On  the  other  hand,  branch  banking  has  many  advan- 
tages. Branch  banks  facilitate  the  collection  and  distri- 
bution of  loanable  capital  from  and  to  different  parts  of 
the  country.  Such  a  system  keeps  its  fingers  on  the  busi- 
ness pulse  of  the  whole  country  and  makes  easy  the  circu- 
lation of  money  from  places  of  surplus  to  places  of  need. 
Such  an  acquaintance  with  the  needs  of  the  whole  country 
cannot  but  add  to  the  solidarity  of  business.  While  it  is 
true  that  a  small  branch  may  afford  adequate  banking 
facilities  for  isolated  places,  one  system  effects  a  compara- 
tively uniform  rate  of  interest.  This  is  an  appealing  argu- 
ment to  the  American  business  man  who  has  suffered  the 
needless  burden  of  wide  differences  in  the  interest  rates 
between  different  sections  of  the  country.  A  bank  with 
branches  reaching  every  section  of  the  country  does  not 
face  ruin  by  local  business  depressions.  Many  towns  are 
built  around  a  single  industry,  and  the  banks  serving  these 
towns  go  down  with  the  failure  of  the  industry.  Branch 
banking  also  secures  superior  executive  ability  at  the  head. 
Inasmuch  as  a  central  policy  guides  the  whole  system,  the 
necessity  of  spreading  rare  ability  over  the  individual 
branches  is  spared.  But  when  such  ability  is  revealed  in 
any  branch  it  is,  through  a  system  of  selection  and  promo- 
tion, advanced  to  a  higher  ranking.  Branch  banking  lends 
efficiency  to  capital.  The  small  nation  with  facilities  for 
marshalling  and  transporting  its  troops  from  front  to  front 
may  withstand  a  foe  far  superior  in  all  but  these  facilities. 
Likewise  a  nation  with  an  adequate  banking  system  that 


310  Introduction  to  Economics 

penetrates  all  sections  may  give  to  a  small  volume  of  capi- 
tal adequate  powers  to  do  the  nation's  work. 

Elasticity :  There  is  a  maximum  legal  limit  to  the  notes 
the  Bank  of  France  may  issue.  But  this  limit  is  virtually 
a  dead  letter  as  it  is  far  in  excess  of  the  usual  issue,  and  is 
modified  in  times  of  need.  We  may  say  that  it  issues 
notes  as  far  as  it  sees  fit;  they  fluctuate  from  week  to  week, 
depending  upon  the  market  needs;  when  they  come  back 
to  the  bank  they  are  not  reissued.  It  discounts  ordinary 
commercial  paper  for  its  customers.  Its  accommodations 
are  for  the  poor  as  well  as  for  the  rich;  it  will  discount 
paper  worth  five  francs  (one  dollar).  It  does  a  large  redis- 
count business  for  other  banks.  Seventy  per  cent  of  its 
paper  bears  the  signature  of  some  other  bank  as  an  in- 
dorsee This  privilege  of  banks  to  have  their  commercial 
paper  rediscounted  enables  a  bank  with  limited  means  to 
make  loans. 

This  bank  gives  to  France  a  strong  centralized  financial 
system,  so  organized  as  to  reach  all  sections  of  the  country, 
and  to  apportion  the  nation's  capital  to  the  local  needs. 
It  furnishes  an  elastic  system;  through  rediscounts  it 
enables  other  banks  to  supply  the  credit  and  monetary 
needs  of  those  who  hold  good  commercial  paper;  it  does 
not  discriminate  between  rich  and  poor  in  extending  its 
accommodations.  It  does  business  for  the  people,  for 
other  banks,  and  for  the  government.  In  marked  contrast 
with  this  centralized  system  is  the  decentralized  national 
banking  system  of  the  United  States. 

4.  Banking  Prior  to  National  Banks. — It  is  beyond  the 
scope  of  this  book  to  trace  through  the  several  types  of 
banks  and  banking  which  preceded  the  national  banking 
system.     At  some  periods  in  the  history  of  ante-bellum 


Banking  Legislation  in  the  United  States     311 

banking  inconvertible  notes  existed  in  weltering  chaos;  the 
secretary  of  the  treasury  could  not,  within  several  millions, 
estimate  their  amount;  they  were  termed  "heterogeneous 
rags"  as  they  poured  forth  in  great  volume  from  "wild- 
cat" or  "coon-box  banks";  they  took,  at  times,  the  form 
of  unchartered  scrip  in  denominations  from  six  cents  up- 
ward; redemption,  if  at  all,  was  at  times  enforced  by 
"lynch  law";  Secretary  McCulloch  spoke,  in  disgust,  of 
the  system,  at  one  time,  "as  a  compound  of  quackery  and 
imposture."  During  these  "good  old  days"  the  pick- 
pockets and  unscrupulous  rogues  had  a  free  license.  When 
Congress  refused  to  recharter  the  second  bank  of  the  United 
States  (a  worthy  institution),  a  large  number  of  state  banks 
sprang  up,  of  the  "joint-stock"  and  limited  liability  type. 
In  not  a  single  state  were  they  subject  either  to  effective 
regulation  or  supervision.  It  was  the  system,  not  the 
banks — the  government,  not  the  bankers — that  was  to  be 
censured.  But  there  were  praiseworthy  characters  among 
bankers,  and  some  illuminating  examples  of  banking. 

5.  The  free  banking  system  of  New  York  deserves  spe- 
cial mention  as  a  forerunner  and  model  for  the  national 
banks.  "The  wildly  extravagant  issues  of  really  incon- 
vertible paper  money,"  says  F.  A.  Walker,  "supplied  the 
motive  and  the  means  for  every  species  of  extravagant, 
wanton,  and  irresponsible  speculation.  Words  could 
scarcely  exaggerate  the  extent  to  which  the  distortion  of 
production  and  the  misapplication  of  capital  were  carried. 
The  whole  head  was  sick  and  whole  heart  faint.  The  retri- 
bution came  in  the  panic  of  1837,  and  in  the  second  and 
heavier  shock  of  1839,  and  in  the  long  and  dreary  prostra- 
tion of  industry  v/hich  followed."1     These  experiences  led 

1  Political  Economy,  pp.  441-442. 


312  Introduction  to  Economics 

to  legislation  designed  to  place  banking  on  a  sound  basis. 
Before  1838  in  New  York  banks  had  special  charters, 
with  the  consequence  that  a  bank  was  a  privileged  mo- 
nopoly. Special  charter  institutions,  banking  or  industrial, 
have  always  been  a  cause  of  political  corruption  and  bri- 
bery of  legislatures.  The  Act  of  1838  was  an  enabling  act. 
It  enabled  any  person  or  group  of  persons  to  engage  in 
banking  on  certain  prescribed  conditions.  One  condition 
was  that  no  bank-notes  could  be  issued  until  security  for 
their  redemption  was  placed  in  the  hands  of  the  comp- 
troller of  the  state.  This  security  had  to  consist  of  United 
States  or  New  York  stocks  or  bonds,  and  of  mortgages  on 
improved  real  estate.  This  scheme  of  secured  circulation 
is  known  as  the  New  York  system.  The  system  was  not 
perfect  in  two  respects:  (1)  It  provided  certain  but  not 
immediate  convertibility  of  notes;  (2)  the  nature  of  the 
securities  to  back  notes  did  not  prove  a  most  fortunate 
selection. 

Different  states  undertook  to  follow  New  York's  exam- 
ple, but  these  attempts  ended  in  failure,  due  to  the  char- 
acter of  securities  with  which  they  backed  their  notes. 
Improvements  which  pointed  to  success,  however,  were 
under  headway  when  the  Civil  War  began,  and  they  were 
superseded  by  the  National  Bank  Act. 

6.  The  National  Bank  Act  was  advocated  in  the  report 
of  Secretary  Chase  in  1861,  but  it  did  not  take  the  form  of 
law  until  February  25,  1863.  In  its  behalf  the  following 
arguments  were  urged. 

Market  for  bonds:  A  prohibitive  tax  was  placed  upon 
the  note  issue  of  banks  other  than  national  banks;  thus 
the  new  banks  were  to  issue  all  bank-notes.  They  were 
required  to  buy  government  bonds  and  deposit  them  at 


Banking  Legislation  in  the  United  States     313 

the  Treasury  Department  in  Washington  as  a  guarantee 
of  the  notes  issued.  The  treasury  was  in  great  distress, 
and  the  demands  upon  it  for  war  purposes  put  the  depart- 
ment in  search  for  new  sources  of  revenue.  It  was  thought 
some  hundreds  of  millions  in  bonds  could  be  sold  to  the 
banks  to  back  their  note  issue.  Moreover,  each  bank, 
whether  it  issued  circulating  notes  or  not,  was  required 
to  deposit  in  the  treasury  a  certain  amount  of  registered 
bonds  of  the  United  States.  To  sell  bonds  to  meet  the 
exigency  of  war  was  the  first  and  primary  object  of  the 
National  Banking  Act;  it  was  truly  a  war  measure.  But 
as  a  fiscal  resource  it  failed.  Not  until  after  the  war  and 
when  the  government  was  on  its  feet — able  to  borrow  at 
home  and  abroad — did  the  national  banks  begin  to  call  for 
bonds  in  large  amounts. 

Uniformity  in  Currency:  We  now  come  to  the  most  re- 
deeming feature  of  the  act.  Notes,  uniform  in  appear- 
ance, in  value,  and  in  acceptability,  came  in  the  place  of  a 
great  variety  of  notes — worthless,  altered,  forged,  and 
other.  Every  holder  of  a  national  bank-note  is  backed 
by  the  credit  of  the  government.  A  note  from  a  bank  in 
Maine  will  pass  as  readily  in  California  as  in  its  home 
state,  and  that,  too,  without  regard  to  the  standing  of 
the  bank  which  issues  it.  No  longer  is  the  holder  of  a 
note  annoyed  from  the  refusal  to  receive  bank-notes  by 
those  unacquainted  with  the  bank  of  issue. 

Curb  Inflation:  State  banks,  during  the  Civil  War  period, 
were  redeeming  their  notes  in  greenbacks.  These  went 
down  in  purchasing  power  with  the  greenbacks  and  added 
largely  to  the  circulating  media.  Could  national  bank- 
notes supersede  state  bank  issues  and  be  limited  in  amount 
to  the  capital  stock  of  the  national  bank,  the  public  credit 


314  Introduction  to  Economics 

would  be  strengthened.  This  would  clear  the  market  of 
state  bank-notes,  leaving  only  greenbacks  and  national 
bank-notes.  The  latter  being  restricted,  the  purchasing 
power  of  greenbacks  would  be  strengthened. 

Public  Deposits:  The  banks  would  provide  a  place  of 
safe-keeping  for  the  government's  funds.  A  number  of 
banks  have  been  designated  by  the  secretary  of  the  trea- 
sury as  depositaries  of  public  money.  These  are  especially 
convenient  for  making  local  disbursements.  The  deposits 
of  the  government  are  running  accounts  like  those  of  pri- 
vate customers.  If  the  government  wishes  to  restore 
funds  to  the  money  market,  it  makes  what  is  known  as 
special  deposits.  To  withdraw  these  advance  notice  is 
given,  and  upon  them  interest  is  to  be  paid  at  a  rate 
prescribed  by  the  secretary  of  the  treasury. 

Tie  People  to  Government:  It  was  argued  that  a  large  dis- 
tribution of  bonds  would  tie  up  the  people's  interest  with 
that  of  the  government.  When  the  national  banks  come 
to  own  millions  of  bonds  they  will  use  their  agency  in  be- 
half of  the  credit  of  the  government.  Likewise  the  peo- 
ple who  hold  bank-notes  supported  by  government  bonds 
will  make  effort  to  safeguard  the  public  credit. 

7.  Provisions  of  the  Act. — The  original  act  and  its  later 
amendments  provided  that  every  national  bank  should 
deposit  registered  United  States  bonds  in  the  treasury, 
whether  it  issued  circulating  notes  or  not.  Every  bank 
may  receive  notes  equal  to  the  par  value  of  the  bonds  de- 
posited by  it,  but  not  exceeding  their  market  value.  Bank- 
notes thus  rest  on  the  credit  of  the  government;  this 
security  remains  if  the  issuing  bank  fails.  Banks  are  re- 
quired to  redeem  their  notes  at  their  own  counter.  And 
in  addition  to  the  bonds  deposited,  each  bank  must  keep 


Banking  Legislation  in  the  United  States     315 

on  deposit  in  the  United  States  Treasury,  in  lawful  money, 
a  sum  equal  to  5  per  cent  of  its  circulation.  This  is  to 
redeem  notes  when  presented  in  sums  of  $1,000  or  multi- 
ple thereof.  What  if  a  bank  fails  ?  The  comptroller  pays 
the  note-holder  in  lawful  money,  and  declares  the  bonds 
which  the  defaulting  bank  has  deposited  to  be  forfeited  to 
the  government.  He  may  cancel  or,  at  his  pleasure,  sell 
bonds  equivalent  to  the  notes  he  redeems.  Suppose  the 
bonds  do  not  fully  reimburse  the  government  for  the  notes 
it  redeems  for  the  failed  bank?  It  has  first  lien  on  the 
assets  of  the  bank,  and  a  right  against  stockholders  who 
are  held  to  double  liability.  When  the  notes  are  paid  they 
are  cancelled. 

In  order  that  country  districts  may  have  banking  facili- 
ties, provision  is  made  that  a  town  having  less  than  3,000 
population  may  have  a  bank  with  a  capital  stock  of 
$25,000.  The  amount  of  capital  required  to  establish  a 
bank  ranges  upward  as  follows:  When  the  population  is 
from  3,000  to  6,000,  at  least  $50,000  capital  is  required; 
when  the  population  is  from  6,000  to  50,000  at  least 
$100,000  capital  is  required;  when  the  population  is  over 
50,000  at  least  $200,000  capital  is  required.  Bank  shares 
must  be  $100  each,  at  least  50  per  cent  of  the  capital  must 
be  paid  in  before  the  bank  begins  business,  and  the  remain- 
der must  be  paid  in  monthly  instalments  of  not  less  than 
10  per  cent  each. 

The  legal  reserve  is  not  the  same  for  all  banks.  Banks 
are  divided  into  three  classes:  Central  reserve  city  banks, 
reserve  city  banks,  and  all  others,  commonly  called  coun- 
try banks.  Prior  to  the  Federal  Reserve  Act  the  country 
banks  (banks  outside  of  certain  large  cities)  were  required 
to  have  as  a  reserve  a  sum  of  lawful  money  equal  to  15 


316  Introduction  to  Economics 

per  cent  of  their  deposits,  but  three-fifths  of  this  15  per 
cent  (or  9  per  cent)  might  be  deposited  in  a  reserve  city 
bank.  Then,  a  country  bank  was  not  required  to  keep  in 
its  own  vaults  a  reserve  of  over  6  per  cent.  Reserve  city 
banks  were  required  to  keep  a  reserve  of  25  per  cent. 
One-half  of  this  (12^  per  cent)  might  be  kept  on  deposit 
in  a  central  reserve  city  bank,  where  it  was  counted  as 
part  of  the  depositing  banks'  legal  reserve.  There  are 
three  central  reserve  cities— New  York,  Chicago,  St.  Louis 
— and  the  banks  in  them  were  required  to  hold  in  their 
vaults  a  reserve  of  lawful  money  equal  to  25  per  cent  of 
their  deposits. 

8.  Defects  of  the  System.— The  national  banking  sys- 
tem accomplished  much  good  for  the  country,  but  it  had 
certain  defects  which  were  largely  responsible  for  the  panics 
and  financial  strains  which  business  has  recurrently  suf- 
fered. The  banks  were  not  equal  to  the  situation  during 
the  panics  of  1893,  I9°3'  and  x907-  Tnere  was  demand 
for  reform;  why  should  the  wealthiest  nation  have  the 
poorest  banking  system  in  the  world?  Yet,  what  was 
there  to  do?  The  subject  was  intensively  studied  after 
1903,  and  in  the  year  following  the  severe  panic  of  1907 
Congress  appointed  a  National  Monetary  Commission. 
This  large  commission,  with  its  corps  of  eminent  scholars 
and  experts  in  finance,  submitted  a  comprehensive  report 
in  191 2.  A  summary  of  that  report  (Report  National 
Monetary  Commission,  6 2d  Congress,  2d  Session;  Senate 
Documents  243,  6-16)  should  be  carefully  read  by  all  stu- 
dents of  economics.  The  chief  faults  of  the  system  were: 
(1)  Decentralization;  (2)  inelasticity  of  credit;  (3)  poor  dis- 
tribution of  banking  facilities  over  the  country;  (4)  no 
American  banking  institutions  in  foreign  countries,  and  (5) 
no  rediscount  system. 


Banking  Legislation  in  the  United  States     317 

9.  Decentralization  of  Banking. — A  national  bank  could 
have  no  branches,  as  does  the  Bank  of  France.  Conse- 
quently, there  was  no  really  national  banking  institution. 
Each  national  bank  was  a  local  institution,  doing  a  local 
business,  and  depending  upon  its  own  resources.  Each 
depended  upon  its  own  reserves  to  meet  its  demand  liabili- 
ties. In  dull  times  country  banks  deposited  a  portion  of 
their  reserves  in  reserve  cities.  Reserve  city  banks  in  turn 
sent  their  idle  cash  to  New  York  City  banks,  which  paid  a 
small  interest  for  it.  Thus  the  idle  funds  of  the  country 
drifted  to  New  York,  the  commercial  and  financial  centre 
of  the  country.  But  New  York  banks  were  not  paying 
interest  on  cash  to  hold  it  idle;  they  loaned  it  out  at  call 
for  use  on  the  stock  and  produce  exchanges,  carrying  the 
required  reserve  of  25  per  cent.  During  a  revival  of 
business — generally  at  crop  planting  or  harvesting  time — 
the  banks  in  the  South  and  West  were  called  upon  by 
depositors  for  cash,  these  banks  called  upon  the  reserve 
city  banks,  and  these  upon  New  York  banks.  The  New 
York  banks  having  loaned  down  to  the  required  reserve 
were  forced  to  call  in  loans,  but  the  borrowers  had  this 
invested  and  found  difficulty  in  liquidating  immediately. 
Just  this  order  of  circumstances  is  largely  responsible  for 
the  recurring  panics  in  this  country,  and  explains  why  they 
have  been  more  acute  than  in  other  countries.  The  year 
1913  was  fairly  normal  as  respecting  banking  conditions, 
and  in  that  year  the  banks  owed  depositors  $20,000,000,- 
000,  when  the  total  currency  of  the  country  was  about  $3,- 
600,000,000.  Less  than  one-half  of  this  was  in  the  banks, 
and  that  centred,  as  above  described,  largely  in  New  York. 
Should  fright  seize  a  fair  portion  of  depositors  and  they 
make  sudden  demands  on  banks,  the  banks  affected  must 
close  their  doors. 


318  Introduction  to  Economics 

A  partial  remedy  is  suggested  in  Mr.  Paul  M.  Warburg's 
illuminating  remark  that  we  must  treat  our  money  reserves 
as  a  city  does  its  water-supply — accumulate  it  in  one  or 
more  large  reservoirs  and  be  able  to  send  it  at  once  to  the 
spot  where  it  is  needed.  France  has  long  since  learned 
this  lesson  and'  practises  it  in  the  manner  above  indicated. 
A  banker  in  Lyons  does  not  fear  his  depositors,  for  the 
Bank  of  France  will  furnish  him  gold  or  notes  in  exchange 
for  his  assets.  "  Depositors  do  not  want  money  when  they 
know  they  can  get  it";  they  make  a  run  on  the  bank  be- 
cause they  fear  they  cannot  get  money. 

Not  only  were  the  national  banks  local  in  organization, 
but  also  their  assets  were  of  a  local  and  non-liquid  charac- 
ter. A  bank's  discounts  are  for  the  most  part  in  the  form 
of  the  promissory  notes  of  its  customers,  and  the  bank 
officials  are  local  men,  on  confidential  terms  with  their 
customers.  Borrowing  is  a  matter  of  private  business,  a 
promissory  note  a  personal  matter,  and  the  borrower  would 
regard  it  a  personal  offense  should  the  banker  attempt  to 
raise  money  on  his  note.  This  is  called  rediscounting — 
the  bank  discounts  a  note  for  a  customer,  and  has  this 
same  note  discounted  again  by  another  bank.  That  is, 
the  bank  buys  the  note  from  its  customer,  and  sells  the 
same  to  another  bank,  taking  its  pay  in  cash  or  in  the  form 
of  an  increased  deposit  at  the  other  bank.  Rediscounting 
is  a  common  practice  in  Europe,  and  a  very  helpful  one  in 
distributing  among  the  people  the  total  loaning  capacity 
of  the  banks.  In  this  country  it  has  been  regarded  as  a 
confession  of  weakness  on  the  part  of  the  bank. 

In  Europe  the  seller  of  wares  draws  a  bill  of  exchange 
or  draft  upon  the  buyer  which  the  buyer  "accepts"  or 
attaches  his  signature  to.     The  creditor  also  indorses  this 


Banking  Legislation  in  the  United  States     3 1 0 

and  has  it  discounted  at  the  bank.  These  are  freely  bought 
and  sold  by  banks,  thus  enabling  a  bank  to  increase  its 
liquid  assets  at  will.  This  furnishes  a  discount  market  for 
the  obligations  of  business  men  which  works  as  freely  as 
do  our  own  markets  for  stocks  and  bonds.  Want  of  a 
discount  market  has  made  more  pronounced  the  local  char- 
acter of  our  banks. 

io.  Inelasticity  of  Credit. — The  rigid  requirements  for 
bank  reserves  (15  or  25  per  cent),  together  with  the  ten- 
dency of  banks  to  keep  their  funds  loaned  to  the  limit,  has 
already  been  commented  upon.  At  crop-planting  or  crop- 
moving  seasons  banks  whose  reserve  percentages  are  at 
the  minimum,  are  not  permitted  to  extend  their  accommo- 
dations. "  A  fixed  reserve  is  to  credit  what  a  stone  wall  is 
to  a  prisoner:  thus  far,  but  no  farther." 

But  the  bond-secured  note  issue  is  the  chief  difficulty. 
A  national  bank  can  issue  notes  to  the  market  value  or  to 
the  par  value,  whichever  is  the  smaller,  of  the  government 
bonds  which  it  buys  and  deposits  in  the  treasury.  As  the 
price  of  bonds  goes  up  the  profits  of  the  bank  must  go  down, 
and  vice  versa.  If  the  par  value  of  a  bond  is  $100  and  its 
market  value  $110,  the  bank  must  pay  $110  for  the  privi- 
lege of  issuing  $100  in  notes.  When  will  banks  issue  a 
large  amount  of  notes  ?  Assuredly,  when  the  price  of  bonds 
is  low.  When  is  the  price  of  bonds  low  ?  Always  when  the 
market  rate  of  interest  is  high.  The  income  on  a  bond  is 
a  fixed  amount.  A  5  per  cent  bond  whose  par  value  is 
$100  yields  the  owner  $5  a  year,  no  more  and  no  less;  it 
yields  this  fixed  sum  whether  the  market  rate  of  interest 
be  1  per  cent  or  10  per  cent.  What  would  a  permanent 
annuity  of  $5  a  year  be  worth  when  the  market  rate  of 
interest  is  10  per  cent?     Fifty  dollars,  because  $5  is  10  per 


320  Introduction  to  Economics 

cent  of  that  sum.  What  if  interest  changes  to  2  per  cent? 
It  will  be  worth  $250  because  $5  is  2  per  cent  of  that  sum. 
As  the  rate  of  interest  goes  up  a  bond  (a  fixed  income  in- 
strument) goes  down  in  price,  and  vice  versa.  When  will 
the  interest  rate  be  high?  On  two  occasions:  (a)  With 
few  exceptions,  when  prosperity  abounds  and  prices  are 
rising;  and  (b)  always  during  the  sudden  fright  of  a  panic. 
Thus,  in  times  of  great  prosperity,  at  the  very  time  when 
the  market  is  not  in  need  of  more  money,  bond  prices  are 
low  and  notes  are  thrown  in  large  volume  upon  the  mar- 
ket. But  the  panic  period  is  short,  and  banks,  in  self- 
preservation,  are  collecting  cash  rather  than  buying  bonds. 
Yet  many  notes  are  issued  during  the  flurry  of  panic. 
When  the  interest  rate  is  low  bonds  are  high  and  note 
issues  few.  When  will  this  be?  During  depressions  and 
periods  of  dull  business,  when  additional  notes  are  most 
needed.  The  expansion  of  notes  is  not  always  at  the 
wrong  time;  fortunately,  it  sometimes  occurs  in  time  of 
need.  But  note  the  direction  of  such  elasticity  afforded 
by  the  national  banks;  it  is  always  out,  not  in.  We  can 
get  notes  out,  but  in  slack  seasons  they  do  not  return. 

11.  Distribution  of  Banking  Facilities. — Banking  facili- 
ties have  developed  with  respect  to  the  urban  centres, 
while  agricultural  districts  have  had  their  prosperity  re- 
tarded for  want  of  banking  accommodations.  No  adequate 
agency  has  been  provided  for  supplying  them  with  funds 
for  their  busy  seasons;  they  have  had  to  pay  higher  inter- 
est rates  than  prevail  in  the  industrial  centres.  National 
banks,  before  1913,  were  forbidden  to  make  loans  on  real 
estate.  The  banking  machinery  was  devised  for  money 
to  drift  from  small  banks  to  the  large  banks — from  coun- 
try districts  to  financial  and  urban  districts.     Deposits 


Banking  Legislation  in  the  United  States     3^1 

did  not  travel  in  the  opposite  direction,  and  when  city 
banks  were  called  upon  to  return  borrowed  funds  to  coun- 
try banks  it  was  calculated  to  cost  a  panic.  What  is  more: 
"We  have  no  effective  agency,"  reports  the  National  Mone- 
tary Commission,  "covering  the  entire  country,  which 
affords  necessary  facilities  for  making  domestic  exchanges 
between  different  localities  and  sections,  or  which  can 
prevent  disastrous  disruption  of  all  such  exchanges  in 
times  of  serious  trouble." 

12.  Banking  and  Foreign  Trade. — To  quote  further  from 
the  commission's  report:  "We  have  no  American  banking 
institutions  in  foreign  countries.  The  organization  of  such 
banks  is  necessary  for  the  development  of  our  foreign 
trade."  European  countries  maintain  such  banks,  much 
to  their  advantage.  These  banks  extend  accommodations 
to  the  financial  and  business  interests  where  located,  enlist 
good- will,  and  attract  attention  to  home  products;  they 
study  local  demands,  inform  their  countrymen  of  prospec- 
tive sales,  report  on  the  credit  of  importers,  negotiate 
trade,  arrange  and  make  it  easy  to  effect  foreign  payments. 
Foreign  banks  handling  American  trade  in  South  America 
and  the  Orient  naturally  favor  their  own  countrymen. 

Competitive  or  decentralized  banking  cannot  protect  or 
regulate  a  nation's  gold  supply.  There  are  times  when  a 
country  has  an  oversupply  of  gold  and  to  export  it  is 
profitable,  and  at  other  times  when  the  supply  is  short  it 
is  necessary  to  attract  gold  from  abroad.  A  central  insti- 
tution to  dominate  the  control  of  foreign  exchange  is  needed 
to  raise  its  rate  to  hold  gold  in  the  country  or  attract  it 
from  abroad,  and  to  lower  its  rate  to  dispose  of  a  surplus. 
A  central  bank  controls  the  expansion  of  credit  which  is 
an  essential  factor  in  depleting  a  nation's  gold  supply. 


322  Introduction  to  Economics 

When  credit  expands  prices  accordingly  rise,  and  it  be- 
comes profitable  to  buy  in  other  countries  where  prices 
range  lower.  Exports  fall  and  imports  increase,  thus  leav- 
ing an  unfavorable  balance  which  must  be  paid  in  gold. 

13.  New  System  Demanded. — When  you  add  to  these 
difficulties  the  constant  meddling,  to  the  displeasure  of 
many,  of  the  national  treasury,  there  is  little  wonder  that 
a  complete  overhauling  of  the  whole  system  was  called  for. 
The  Aldrich  plan,  committed  to  the  principle  of  a  central 
bank,  was  brought  forth  and  intensively  debated.  At  this 
time  the  Democratic  party  came  into  power,  pledged 
against  the  plan  bearing  the  name  of  the  champion  of 
high  tariff.  None  the  less,  the  new  administration  adopted 
the  essence  of  the  plan,  but  provided,  as  we  shall  now  see, 
twelve  central  banks  instead  of  one. 

14.  The  Federal  Reserve  Act  became  law  December  23, 
1913.  It  created  twelve  regional  banks,  each  of  which  is 
to  keep  the  reserves  of  the  district  in  which  it  is  located. 
In  each  of  the  districts,  designed  as  1st,  2d,  3d,  and  so  on 
to  the  1 2th,  the  regional  banks  are  located  as  follows:  No.  1, 
Boston;  No.  2,  New  York  City;  No.  3,  Philadelphia;  No. 
4,  Cleveland;  No.  5,  Richmond;  No.  6,  Atlanta;  No.  7,  Chi- 
cago; No.  8,  St.  Louis;  No.  9,  Minneapolis;  No.  10,  Kansas 
City;  No.  n,  Dallas;  No.  12,  San  Francisco.  The  districts 
have  undergone  slight  modification  as  to  boundary  and 
may  be  further  modified.  Missouri  is  the  only  State  hav- 
ing two  regional  banks. 

15.  The  Federal  Reserve  Board. — The  whole  system  is 
under  the  supervision  of  a  governing  board,  called  the 
Federal  Reserve  Board,  with  headquarters  in  Washington. 
There  are  seven  members  of  the  board,  two  of  whom  are 
ex-ojjicio,  the  secretary  of  the  treasury  and  the  comptroller 


Banking  Legislation  in  the  United  States     323 

of  the  currency.  Five  members  are  appointed  by  the 
President  of  the  United  States,  for  a  period  of  ten  years, 
and  at  a  salary  of  $12,000  a  year.  As  head  of  the  whole 
system  this  board  is  charged  with  heavy  responsibilities. 

Committed  to  its  direction  are  the  following  powers :  To 
protect  the  national  gold  supply;  to  provide  an  elastic  cur- 
rency through  the  contraction  and  expansion  of  notes;  to 
provide  a  systematic  pooling  of  reserves  of  existing  banks, 
thus  securing  economy  in  and  an  effective  utilization  of 
the  money  supply;  to  provide  a  free  and  general  discount 
market  for  commercial  paper.  The  law  provides  that  this 
central  board  may  (1)  compel  one  regional  bank  to  redis- 
count commercial  paper  held  by  other  regional  banks,  and 
may  determine  the  rate  at  which  such  rediscounts  are 
made.  Thus  the  privilege  of  one  bank  to  rely  upon  others 
so  organizes  banking  facilities  that  their  resources  are 
denied  to  no  section,  and  are  at  the  disposal  of  all  who 
can  offer  paper  measuring  up  to  a  certain  standard.  A 
marked  contrast  is  this  to  the  old  decentralized  system 
where  each  bank  must  deny  credit,  and  in  self-defense  call 
in  reserves  when  expansion  is  most  needed.  The  board 
may  (2)  suspend  reserve  requirements,  thus  effecting  an 
economy  in  gold,  and  adding  to  the  lending  power  of  banks. 
It  may  (3)  suspend  for  cause  any  officer  or  director  of  a 
regional  bank  in  its  exercise  of  general  supervision  over 
the  whole  system.  It  may  (4)  regulate  the  issue  and 
retirement  of  Federal  Reserve  notes.  Regarding  this 
means  of  providing  an  elastic  currency  more  will  be  said 
a  moment  later. 

16.  The  reserve  banks  are  banks  for  bankers  in  their 
respective  districts.  Every  national  bank  in  the  district 
is   required,   and    State   banks   and   trust   companies  are 


324  Introduction  to  Economics 

privileged,  to  subscribe  for  stock  to  an  amount  equal  to 
6  per  cent  of  the  subscribing  bank's  capital  and  surplus. 
Thus,  reserve  banks  are  owned  by  other  banks,  which  are 
known  as  member  banks.  Their  dealings  as  a  rule  are 
limited  to  member  banks,  but  these  stockholders  or  mem- 
ber banks  do  not  get  all  the  earnings  in  dividends.  Part 
of  these  earnings  go  to  the  United  States  as  a  franchise 
tax. 

What  They  Do:  A  regional  or  federal  reserve  bank  may 
accept  deposits  from  the  government  (and  from  non-mem- 
ber banks  for  exchange  purposes);  discount  notes,  drafts, 
and  bills  of  exchange  indorsed  by  a  member  bank  and 
drawn  for  agricultural,  industrial,  and  commercial  pur- 
poses; discount  acceptances  based  upon  the  importation 
and  exportation  of  goods;  deal  in  bills  of  exchange;  deal  in 
gold  coin  or  bullion;  deal  in  government  obligations  and 
short-time  obligations  of  States  and  municipalities;  carry 
balances  with  other  regional  banks  for  exchange  purposes; 
establish  branches  in  its  own  district  and  in  foreign  coun- 
tries; and,  subject  to  the  approval  and  determination  of 
the  Reserve  Board,  fix  its  rate  of  discount. 

Directors:  Over  each  regional  bank  are  nine  directors 
who  are  divided  into  three  classes  of  three  men  each. 
Class  A  are  chosen  by  the  member  banks  and  are  presum- 
ably bankers,  class  B  are  chosen  by  the  member  banks 
but  must  not  be  bankers,  class  C  are  chosen  by  the  Federal 
Reserve  Board  to  represent  the  general  public,  but  two  of 
these  must  be  bankers. 

17.  Federal  Reserve  Notes. — Provision  is  made  in  the 
act  for  the  gradual  withdrawal  of  national  bank-notes. 
But  these  notes  may,  if  national  banks  so  desire,  continue 
in  circulation. 

The  notes  issued  by  the  regional  banks  may  be  in  de- 


Banking  Legislation  in  the  United  States     325 

nominations  of  $5,  $10,  $20,  $50,  $100,  $500,  and  $1,000. 
They  are  receivable  by  all  member  banks  and  regional 
banks,  and  for  taxes,  customs,  and  other  public  dues. 

These  notes  are  not  secured  by  government  bonds,  but 
by  a  deposit  either  of  gold  or  commercial  paper;  further- 
more, they  are  obligations  of  the  United  States,  and  they 
are  also  secured  by  the  assets  of  the  issuing  bank.  They 
are  redeemable  in  gold  at  the  treasury  and  in  gold  or  law- 
ful money  at  the  regional  banks. 

A  regional  bank  must  send  to  the  treasury  or  return  to 
the  issuing  bank,  and  not  reissue  any  notes  of  other  regional 
banks  which  it  may  receive.  This  brings  notes  back  to 
the  issuing  bank,  limits  their  circulation  in  other  reserve 
districts,  and  shortens  the  time  during  which  they  remain 
in  circulation. 

18.  Reserves  of  Federal  Reserve  Banks. — A  regional 
bank  must  carry  a  reserve  in  gold  of  not  less  than  40  per 
cent  against  its  notes,  and  35  per  cent  in  gold  or  lawful 
money  against  its  deposits.  Any  deficiency  is  subject  to 
a  graduated  tax. 

A  tax  of  1  per  cent  per  annum  is  charged  upon  each  such 
deficiency  until  the  reserve  is  lowered  to  32^  per  cent, 
thereafter  \x/i  per  cent  tax  is  added  for  each  2]/2  per  cent 
deficiency  or  fraction  thereof.  The  following  table  will 
show  this: 

When  the  reserves  against  notes  The  tax  rate  upon  the  total  de- 
are:  ficiency  shall  be: 
Below  40.0  to  32.5  per  cent.  i.o  per  cent. 
Below  32.5  to  30.0  per  cent.  2.5  per  cent. 
Below  30.0  to  27.5  per  cent.  4°  Per  cent. 
Below  27.5  to  25.0  per  cent.  5-5  Per  cent- 
Below  25.0  to  22.5  per  cent.  7.0  per  cent. 
Below  22.5  to  20.0  per  cent.  8.5  per  cent. 
Below  20.0  to  17.5  per  cent.  10.0  per  cent. 


326  Introduction  to  Economics 

The  bank  paying  this  tax  must  add  an  equivalent  amount 
to  the  interest  and  discount  charged  member  banks.  This 
enables  a  necessary  expansion  of  the  note  issue  in  times  of 
emergency.  The  heavy  tax  paid  upon  a  deficiency  below 
the  required  reserve  will  encourage  banks  to  withdraw 
their  notes  from  circulation  when  the  emergency  calling 
them  out  is  over.  Professor  Fetter  illustrates  these  facts 
thus:  " Suppose  for  example  that  the  circulating  notes 
were  in  normal  times  $1,000,000,000,  and  the  reserves, 
therefore,  were  $400,000,000  and  the  rate  of  discount  5 
per  cent.  Then  the  circulation  might  be  doubled  with  the 
same  reserves,  the  proportion  thus  falling  to  20  per  cent 
of  outstanding  notes,  and  the  rate  of  discount  to  customers 
rising  to  13.5  per  cent  (5  plus  8.5)."  l 

The  Federal  Reserve  Board  may,  in  times  of  emergency, 
reduce  reserves  against  both  notes  and  deposits,  and  in 
both  regional  and  member  banks,  down  to  the  last  dollar. 
This  affords  an  opportunity  to  provide  sufficient  credit  for 
any  emergency. 

19.  Reserves  in  Member  Banks. — The  act  makes  a  wise 
distinction  between  the  reserve  requirements  for  time  de- 
posits and  demand  deposits,  in  case  of  all  member  banks. 
They  are  required  to  keep  no  more  than  a  3  per  cent 
reserve  against  time  deposits.  The  purpose  of  this  require- 
ment is  to  encourage  banks  to  establish  savings  depart- 
ments. 

The  reserve  required  for  banks  in  the  central  reserve 
cities  is  reduced  from  25  to  13  per  cent,  in  reserve  cities 
from  25  to  10  per  cent,  and  in  other  banks  from  15  to  7  per 
cent.  We  have  seen  that  the  depositaries  of  funds  that 
might  be  counted  a  part  of  a  bank's  reserve  were  in  the 

1  Modern  Economic  Problems,  p.  1 24. 


Banking  Legislation  in  the  United  States     327 

reserve  and  central  reserve  cities.  The  regional  banks  are 
now  such  depositaries,  and  all  legal  reserves  of  member 
banks  must  be  on  deposit  with  them,  no  reserve  in  vault 
being  required  of  member  banks. 

20.  Noteworthy  Features  of  the  Law. — The  law  would 
break  down  a  monopoly  control  of  the  money  supply  by 
large  banking  syndicates,  and  give  the  advantage  of  credit 
to  all  worthy  investors.  It  would  insure  the  pooling  or 
co-operant  use  of  reserves,  thus  putting  adequate  lending 
power  at  the  disposal  of  banks  in  all  sections  of  the  coun- 
try and  at  all  seasons  of  the  year.  To  this  end  regional 
banks  are  empowered  to  maintain  branches,  and  inter- 
dependence among  all  banks  has  been  established.  Banks 
are  not  now  compelled  to  withdraw  currency  from  the 
market  and  hoard  it  as  a  means  of  fortifying  themselves 
against  danger.  Centralized  reserves  will  also  secure  an 
economy  in  gold.  Adequate  provision  for  acceptances  and 
rediscounts  is  provided,  a  judicious  use  of  which  will  make 
slow-moving  securities  liquid,  give  the  widest  employment 
to  local  resources,  and  facilitate  the  movement  of  goods 
into  and  out  of  the  country.  This  will  create  new  and 
convenient  types  of  paper,  giving  them  stability  and  cer- 
tainty in  the  market.  But  more  important,  an  adequate 
distribution  of  funds  in  time  and  place  will  equalize  the 
interest  rate  over  the  whole  country.  The  most  note- 
worthy features  of  the  law  are  those  which  add  to  the  elas- 
ticity of  deposits  and  notes.  We  have  seen  how  the  ex- 
pansion and  contraction  of  notes,  as  well  as  liberality  in 
reserve  requirements,  work  to  effect  this  elasticity. 

The  Transmission  of  Funds  :  American  commerce  has  suf- 
fered because  of  the  excessive  charges  made  upon  business 
men  for  the  collection  and  transmission  of  their  funds. 


328  Introduction  to  Economics 

Prior  to  the  Federal  Reserve  Act  country  banks  carried 
this  type  of  extortion  to  the  point  where  some  of  them 
made  fully  one-half  of  their  earnings  from  such  charges. 
Provision  is  now  made  for  clearing  checks  through  the 
regional  banks  and  for  collecting  drafts.  Member  banks 
may  charge  clients  a  fee  sufficient  to  cover  the  actual  cost 
of  collecting  funds,  but  these  charges  are  under  federal 

control. 

Foreign  Branches:  Americans  heretofore,  who  have  en- 
gaged in  foreign  trade  or  operated  branch  houses  abroad 
either  have  financed  themselves  or  depended  upon  foreign 
banks.  South  America  is  a  developing  field  for  our  busi- 
ness. Until  branches  of  American  banks  were  established 
there,  our  business  men  depended  largely  upon  branches 
of  European  banks.  The  charge  has  been  made  that  such 
banks,  working  as  they  did  in  close  harmony  with  mer- 
chants of  their  own  nationality,  were  often  unfaithful  to 
their  American  clientele,  allowing  competitors  to  know 
their  business  operations,  and,  when  disposed  to  do  so, 
cutting  off  their  credit  in  favor  of  such  rivals.1  Banks  may 
now  establish  branches  abroad,  with  the  permission  of  the 
Reserve  Board,  which  will  be  operated  subject  to  very  lib- 
eral terms.  This  will  provide  the  needed  foreign  banking 
accommodations  to  place  American  business  men  upon  a 
footing  of  equality  with  foreign  competitors. 

21.  Exercises. — i.  If  in  France  prices  are  rising  owing  to 
an  inflation  of  currency,  there  will  be  a  tendency  for  im- 
ports to  increase  and  for  gold  to  be  exported.  What  could 
the  Bank  of  France  do  to  remedy  the  situation? 

2.  A  central  bank  with  branches  in  different  sections  of 

1  American  Economic  Review,  IV,  p.  22. 


Banking  Legislation  in  the  United  States     329 

the  country  is  more  desirable  than  a  decentralized  system 
such  as  have  been  the  national  banks  in  the  United  States. 

Define  the  terms  italicized. 

Make  an  argument  for,  and  an  argument  against  this 
statement. 

3.  What  is  meant  by  the  elasticity  of  currency?  What 
are  its  advantages? 

4.  Compare  the  free  banking  system  of  New  York  with 
the  national  banking  system. 

5.  What  arguments  were  made  for  the  National  Bank- 
ing Act  prior  to  its  adoption  ?  Were  these  arguments  cor- 
rect? 

6.  How  was  the  financial  situation  affected  by  the  cus- 
tom of  banks  to  deposit  a  part  of  their  reserves  in  New 
York  banks?     (Foster.) 

7.  What  was  the  chief  problem  that  grew  out  of  the 
seasonal  demands  for  currency? 

8.  Tell  why  note  issues  under  the  national  banking  sys- 
tem run  counter  to  the  requirements  of  business? 

9.  An  item  in  the  financial  page: 

The  rediscounting  of  commercial  paper  at  the  Federal  Reserve 
Bank  of  New  York  by  some  of  the  city's  largest  banks  on  Wednes- 
day had  the  effect  yesterday  of  improving  general  money  market 
conditions.  Call  loans  which  were  made  at  15  per  cent  on  Mon- 
day, and  as  high  as  10  per  cent  on  Tuesday,  and  touched  7  per  cent 
Wednesday,  were  placed  yesterday  at  from  3  to  5  per  cent.  Most 
of  the  loans  were  made  at  4K  per  cent,  the  renewal  rate,  and  the 
closing  quotation  was  3  per  cent.     Time  money  rates  were  easier. 

Explain  the  process  of  rediscounting  here  referred  to. 
In  just  what  way  did  the  rediscounting  operations  relieve 
the  call  money  market  ?  Do  you  consider  that  this  use  of 
the  rediscounting  facilities  provided  by  the  Federal  Reserve 
System  was  in  accord  with  sound  banking  principles  ?  Was 
it  the  best  possible  use  of  the  rediscounting  mechanism? 

10.  A  financial  stringency  is  felt  in  the  ninth  and  tenth 
Federal  Reserve  Districts  owing  to  the  fall-crop  movement. 


330  Introduction  to  Economics 

Cash  is  scarce.  What  action  may  the  Federal  Reserve 
Board  take  to  remedy  the  situation?     (Foster.) 

ii.  The  Federal  Reserve  Board  desires  to  force  up  the 
market  rate  of  interest  as  a  means  of  checking  overspecu- 
lation  and  inflation.  The  banks  have  large  reserves  on 
hand.  The  rediscount  rate  is  raised.  In  your  opinion, 
will  this  achieve  the  desired  result?     Explain. 

If  your  answer  to  the  preceding  question  is  in  the  nega- 
tive, outline  in  detail  what  plan  may  be  followed.  (Fos- 
ter.) 

12.  Explain  carefully  why  Federal  Reserve  notes  cause 
a  greater  elasticity  of  currency  than  was  secured  by  means 
of  national  bank-notes. 

13.  In  times  of  emergency  the  Reserve  Board  may  fur- 
nish relief  through  its  power  to  regulate  the  reserve  of  a 
member  bank.     Explain  how  this  may  be  done. 


CHAPTER   XV 
THE  ORGANIZATION  OF  PRODUCTION 

i.  National  forces  co-operate  in  war.  2.  The  co-operant  forces  of  indus- 
try. 3.  The  automatic  adjustment  in  industry.  4.  Adjustments  never 
complete.  5.  Quantitative  precision.  6.  The  services  of  men  standard- 
ized. 7.  The  test  of  production  not  on  moral  grounds.  8.  The  test  of 
production  not  tangibility.  9.  Social  production  refers  to  amount.  10.  In- 
dividualistic and  social  view-points.  11.  The  entrepreneur.  12.  Functions 
of  the  entrepreneur.  13.  The  entrepreneur  is  a  self-employed  middleman. 
14.  The  entrepreneur  as  servant  of  demand.  15.  The  uses  of  materials. 
16.  Direct  and  indirect  uses  of  goods.     17.  The  agencies.     18.  Exercises. 

i.  National  Forces  Co-operate  in  War. — During  a  great 
war  nations  are  organized  into  vast  fighting  machines. 
One  purpose  guides  and  shapes  these  organizations — to 
overpower  the  enemy.  Into  one  complex  whole  the  powers 
of  the  nation  are  integrated  so  that  they  operate  succes- 
sively and  simultaneously.  That  is  to  say,  the  forces  of 
the  nation  under  one  supreme  command  are  knit  together, 
so  as  to  form  a  compact  harmonious  whole  of  all  the  re- 
lated branches  and  necessary  processes  of  the  belligerent 
powers  of  the  nation.  These  forces  operate  successively, 
so  that  step  by  step  raw  materials  in  the  ground  are  ex- 
tracted, transported,  and  through  many  processes  shaped 
into  finished  forms. 

These  forces  operate  simultaneously,  so  that  all  the  nec- 
essary divisions  of  labor  are  at  one  time  joint  or  co-operant 
forces  to  a  common  end.  The  organization  embodies  divi- 
sions of  infantry,  cavalry,  artillery,  ammunition  columns, 
engineers,  and  transporting  facilities  to  furnish  supplies  at 

331 


332  Introduction  to  Economics 

the  front.  But  the  war  would  be  of  short  duration  were 
this  all.  Whence  these  supplies?  From  the  shops,  mills, 
and  factories  that  shape  raw  materials  into  ripe  goods. 
Whence  the  raw  materials  ?  From  the  mines,  forests,  fish- 
eries, and  farms.  This  vast  system  embraces:  All  laborers, 
from  the  miner  in  the  shaft  to  the  soldier  in  the  trench;  all 
materials,  from  the  minerals  embedded  in  the  crevices  of 
rocks  to  the  shell  exploding  over  the  batteries  of  the 
enemy;  all  the  comforts  from  their  elemental  forms,  through 
the  many  processes,  till  they  come  to  clothe,  feed,  amuse, 
instruct,  and  otherwise  provide  the  personnel  of  the 
nation. 

These  forces,  so  integrated  into  a  vast  fighting  machine, 
are  but  the  elements  of  one  composite  unit  that  is  subject 
to  orderly  regulation.  The  seat  of  authoritative  regulation 
is  in  the  all-powerful  sovereignty  of  the  state.  From  this 
source  power  is  delegated  to  a  commander  (though  chief 
servant  he  is)  with  general  supervision  over  all  the  forces 
in  the  field.  This  power  is  further  redelegated  to  com- 
manders of  divisions  and  so  on  down  to  the  squad  corporals. 

The  roar  of  musketry  and  the  strategy  of  officers  may 
obscure  the  vision  as  to  those  who  are  extracting,  trans- 
porting, and  shaping  materials.  But  in  fact  these  silent 
workers  co-operate  in  the  common  plan  to  serve  the  com- 
mon purpose  of  the  state.  All  the  forces  of  men  and  mate- 
rials are  not  separate  units,  but  under  a  structural  organi- 
zation they  fuse  into  one  productive  system. 

What  the  people  want  they  produce,  and  they  produce 
nothing  else.  Desire  is  the  motivating  force  which  shapes 
a  system  and  sets  it  in  operation.  If  you  would  know 
what  a  people  produce  ask,  first,  as  to  the  nature  of  their 
desires.     It  took  mastership  to  bring  productive  power  to 


The  Organization  of  Production  333 

its  present  height,  and  it  could  not  be  maintained  at  that 
height  one  year  without  it. 

2.  The  Co-operant  Forces  of  Industry. — As  in  time  of 
war  so  in  time  of  peace,  industries  are  shaped  in  obedience 
to  the  demands  of  the  people.  What  the  people  want  they 
produce,  and  changes  in  desires  affect  the  shape  of  industries 
and  bend  the  direction  of  human  endeavor  into  new  lines. 

Productive  capacity  embodies  all  the  agencies  which 
supply  the  means  of  gratifying  desires.  It  consists  of 
natural  resources,  of  the  scientific  knowledge  of  the  ways 
and  means  of  utilizing  these  resources,  of  the  technological 
equipment  through  which  this  knowledge  operates. 

But  there  may  be  capacity  which  lies  dormant.  The 
most  effective  utilization  of  this  capacity  is  the  most  fun- 
damental industrial  problem.  A  solution  of  this  problem 
is  to  be  found  in  the  method  of  analysis  and  co-operation. 
The  productive  process  is  analyzed  into  its  constituent  ele- 
ments; tasks  are  divided  into  difficult  and  easy,  mechani- 
cal and  intellectual,  skilled  and  crude.  Men  are,  accord- 
ing to  their  fitness,  set  to  the  numerous  tasks  which  make 
up  the  industrial  process.  There  are  tasks  for  each  and 
all;  the  miner,  the  transporter,  the  manufacturer,  the  mid- 
dleman, the  lawyer,  the  artist,  the  comedian,  and  the  rest. 

The  scope  of  the  industrial  process  is  larger  than  the 
worker,  or  the  resources,  or  the  organization — it  is  a  co- 
operation of  all  these  in  one  composite  whole.  No  one 
division  of  industry  is  independent  of  other  divisions  car- 
ried on  elsewhere.  Any  one  division  of  the  productive 
process  presupposes  the  proper  working  of  many  others;  it 
follows  some,  precedes  others,  and  operates  simultaneously 
with  others.  Each  fits  into  and  becomes  a  part  of  the 
industrial  order.     The  line  of  work  followed  by  each  is 


334  Introduction  to  Economics 

adapted  to  and  determined  by  the  other  divisions  of  the 
whole  process.  There  is  no  severalty  of  processes;  they 
are  interlocked. 

3.  The  Automatic  Adjustment  in  Industry. — The  pro- 
ducer invests  his  labor  and  means  according  to  the  princi- 
ple of  comparative  value.  Why,  for  example,  do  not 
farmers  sow  their  lands  wholly  to  wheat?  They  produce 
for  the  market,  and  their  self-interest  causes  them  to  plant 
such  crops  as  will  yield  the  largest  net  money  return. 
Should  all  turn  to  the  production  of  wheat,  that  product 
would  be  cheap  and  others  dear.  The  demands  of  the 
people  operating  through  the  self-interest  of  the  farmers 
thus  cause  a  variety  of  crops.  Apply  this  principle  to  the 
whole  industrial  order,  and  we  have  the  explanation  of 
variety  in  the  processes  of  production. 

The  principle  of  comparative  value,  where  competition 
is  unobstructed,  explains  why  there  is  a  tendency  for  profits 
to  be  uniform  throughout  the  industrial  process.  As  the 
farmer  would  shift  from  wheat  production  to  the  growing 
of  swine  in  order  to  increase  his  net  income,  so  would  pro- 
ductive energy  in  any  line  be  shifted  to  another  and  more 
remunerative  field.  But  all  producers  are  actuated  by 
the  motive  of  largest  gain,  and  this  causes  productive 
power  to  shift  from  places  where  it  exists  in  largest  abun- 
dance (where  money  returns  are  small)  to  places  where  it 
is  scarce  (where  money  returns  are  large).  In  this  way 
the  shifting  of  the  means  of  production  tends  to  equalize 
returns  throughout  the  industrial  system. 

4.  Adjustments  Never  Complete. — Immobility  of  pro- 
ductive agencies  retards  and,  I  may  say,  defeats  a  perfect 
equilibrium  of  returns  throughout  all  industry.  Assume 
that  a  community  has  a  most  intelligent  population,  that 
in  alertness,  prosperity,  and  inventiveness  it  ranks  second 


The  Organization  of  Production  335 

to  none — even  such  a  people  are  slow  to  adjust  themselves 
to  new  needs.  If  such  a  people  are  suddenly  called  upon 
to  construct  new  ships  to  counterbalance  the  destruction 
by  a  fleet  of  submarines,  it  takes  many  months  to  make 
the  necessary  readjustments  of  the  productive  power  which 
is  ordinarily  devoted  to  the  arts  of  peaceful  industry. 

Capitalists  invest  their  means  in  forms  that  are  more  or 
less  fixed  and  can  convert  their  wealth  into  new  forms 
only  after  much  delay.  If  one  has  invested  in  or  con- 
structed a  mill  which  utilized  power  from  a  waterfall,  he 
could  change  the  place  of  his  mill  or  reconstruct  it  to  take 
advantage  of  steam-power,  only  against  great  resistance 
and  at  heavy  cost  in  time  and  money. 

The  risk  involved  in  a  change  of  investment  lends  to 
the  immobility  of  productive  agencies.  The  differentia- 
tion, specialization,  and  localization  of  trades  vastly  in- 
crease productive  power,  but  the  risk  of  loss  from  a  mis- 
adventure is  large  in  proportion  to  the  chances  of  gain. 
To  enlarge  productive  equipment  is  to  enhance  the  risk  of 
loss.  If  Smith  has  specialized  in  the  shoe  trade — knows 
that  trade  and  none  other — his  risk  is  large  if  he  attempts 
to  transfer  his  means  to  the  hat  trade,  of  which  he  is 
ignorant.  Or  through  no  fault  of  his  own  a  new  invention 
may  reduce  him  to  penury  over  a  week's  end.  This  is  an 
era  of  specialists;  specialists  are  ignorant  of  advantages  in 
other  fields  and  helpless  if  the  opportunities  for  working  in 
their  own  field  are  taken  away.  And  this  may  be  done  by 
a  monopoly  entering  the  field,  or  by  an  invention,  or  by  a 
change  in  demand.  So  many  are  the  risks  of  loss  that  the 
less  adventurous  are  willing  to  "go  slow  and  let  well  enough 
alone." 

Backward  peoples  follow  in  the  footsteps  of  their  fathers 
century  in  and  century  out;  advanced  peoples  not  infre- 


336  Introduction  to  Economics 

quently  find  that  readjustments  are  not  fully  accomplished 
in  the  generation  that  first  feels  the  necessity  of  them. 
The  mobility  of  productive  power  is  a  matter  of  degree, 
less  pronounced  among  backward  peoples  and  more  tardy 
where  investments  are  of  a  fixed  nature.  There  is  always 
a  tendency  to  bring  about  a  well-ordered  proportion  and 
balance  among  all  branches  of  industry;  but  such  is  never 
fully  accomplished. 

5.  Quantitative  precision  is  another  characteristic  of 
the  industrial  process.  This  is  an  age  of  machinery, 
whereas  prior  to  the  industrial  revolution,  except  for  a 
few  simple  tools  belonging  to  workmen  themselves,  work 
was  done  by  hand.  With  the  introduction  of  steam-power 
large  and  expensive  machinery  made  competition  by  hand 
processes  impossible,  and  the  cost  of  such  machines  made 
it  possible  for  only  capitalists  to  own  them.  Thus  the  in- 
troduction of  steam-power  brought  about  a  distinct  class 
of  owners,  a  distinct  class  of  workers  or  hired  men,  and 
congregated  labor.  The  use  of  machinery  is  found  in  all 
industry;  it  has  so  subdivided  work  as  to  break  up  labor 
into  simple  movements,  and  it  has  made  of  all  industry 
one  balanced  mechanical  process. 

As  the  unerring  time-piece  requires  exact  functioning  on 
the  part  of  each  cog,  wheel,  and  spring,  so  the  machine 
process  requires  quantitative  precision  and  accurate  func- 
tioning in  point  of  time  and  sequence.  Mechanical  accu- 
racy requires  uniformity  of  processes,  standardization  of 
tools,  and  staple  grades  of  output.  Mechanical  standard- 
ization has  taken  the  place  of  the  craftsman's  skill  that 
adapted  the  output  to  any  style,  cut,  and  trim  which  the 
fancy  of  the  user  might  dictate. 

It  would  be  difficult,  costly,  time-consuming,  and  I  shall 
say  impossible  to  equip  an  army  with  rifles  were  each  made 


The  Organization  of  Production  337 

after  an  individual  pattern  to  suit  the  fancy  of  the  soldier 
who  might  use  it.  But  if  standardized  to  one  pattern  and 
the  several  parts  made  of  a  definite  size,  shape,  and  gauge, 
then  high-power  machinery  will  be  constructed  for  the 
specific  purpose  of  making  rifles  and,  without  undue  delay, 
will  produce  them  in  the  needed  abundance.  Consumers 
object  at  times  to  standardization  on  the  ground  that  one's 
individuality  cannot  show  itself,  since  all  must  buy  goods 
made  according  to  a  common  pattern.  Standardization 
applies  to  the  agencies  which  transport  us,  which  transport 
our  goods,  and  which  transport  our  messages.  The  tools 
and  machinery  of  production  are  made  according  to  a 
definite  grading  in  size,  shape,  and  gauge.  The  articles  of 
consumption — clothing,  food  products,  home-furnishings, 
and  the  like — are  standardized  and  stamped  as  to  grade, 
weight,  and  content.  This  has  led  to  uniform  systems  of 
weights  and  measures. 

6.  The  services  of  men  are  standardized.  A  standard- 
ized machine  process  works  with  automatic  precision. 
Maladjustment  in  one  department  affects  the  smooth  work- 
ing of  the  process  as  would  the  disorder  of  a  spring  defeat 
the  accurate  time-keeping  of  a  clock.  Any  part  can  per- 
form its  function  in  full  only  when  the  other  parts  are 
rightly  adjusted  and  properly  working.  The  nature  of  the 
workman's  job  is  determined  for  him  by  the  machine 
which  he  is  to  operate,  and  a  pace  or  rapidity  of  work  is 
set  for  him  by  the  rapidity  of  the  movements  which  work 
in  sequence  throughout  a  plant,  and  the  quality  of  his 
work  is  set  by  the  standard  or  grade  of  excellence  which 
the  output  is  required  to  reach.  The  worth  of  a  laborer  is 
measured  in  units  of  output. 

7.  The  Test  of  Production  Not  on  Moral  Grounds. — 
To  this  point  reference  has  been  made  only  to  the  external 


338  Introduction  to  Economics 

form  of  the  productive  system.  We  have  seen  that  pro- 
ductive forces  interlock  and  work  co-operantly.  This,  it 
has  been  pointed  out,  requires  that  a  proportion  and  bal- 
ance must  exist  among  the  several  parts  to  guarantee  their 
smooth  and  harmonious  joint  operation.  The  introduction 
of  machinery  results  in  the  congregation  of  labor,  and 
brings  about  the  rather  distinct  classes  of  capitalists  and 
workers,  as  well  as  another  class  to  be  considered  a  moment 
later — the  entrepreneur.  We  have  also  seen  that  the  most 
marked  characteristic  of  the  productive  order  is  standard- 
ization, which  is  a  consequence  of  the  comprehensive  use 
of  machinery. 

It  is  now  time  to  inquire  what  this  is  all  about :  What  is 
production,  and  what  the  thing  produced  ?  It  has*  been 
stated  that  people  produce  that  which  they  desire,  that 
they  intentionally  produce  nothing  else,  that  desire  is  the. 
motivating  force  of  production.  All  productive  energy  is 
directed  toward  the  gratification  of  desires,  and  production 
is  itself  the  creation  of  the  means  of  gratifying  desires  and 
needs.  Production  is  the  creation  of  desirabilities  and 
utilities. 

Competitive  production  consists  in  so  changing  things 
that  they  command  a  price.  Production,  for  the  most 
part,  redounds  to  human  well-being,  but  it  may  also  work 
to  the  injury  of  man.  Acts  are  not  judged  as  productive 
or  unproductive  on  moral  grounds.  The  outfit  for  the 
gambler,  the  equipment  for  the  highwayman,  liquor  for 
the  drunkard,  and  opium  for  the  drug  fiend  are  economic 
products,  and  that  which  produces  them  is  productive. 

8.  The  Test  of  Production  Not  Tangibility.— Acts  are 
not  judged  as  productive  or  unproductive  with  regard  to 
tangibility.  The  preaching  of  a  sermon,  the  dancing  act, 
the  work  of  the  menial  servant  or  of  the  musician  do  not 


The  Organization  of  Production  339 

result  in  tangible  products  as  does  the  work  of  farmers, 
carpenters,  and  cabinetmakers.  But  they  gratify  desires 
directly;  the  cabinetmaker  gratifies  desires  indirectly,  his 
labor  taking  the  form  of  a  cabinet  which  in  turn  gratifies 
the  user. 

Production  and  destruction  are  antonyms,  yet  all  pro- 
duction involves  destruction.  Fire  destroys  fuel  in  firing 
an  engine,  chemicals  are  used  up  in  making  medicines, 
building  materials  are  consumed  in  the  erection  of  a  house, 
and  so  on  through  all  production.  Labor,  time,  materials 
are  requisites  of  and  are  used  up  in  production.  But  skill 
in  production  minimizes  the  necessary  wastes.  Should  the 
untrained  hand  attempt  to  draw  a  cartoon  the  result  would 
be  an  awkward  grouping  of  marks — a  waste  of  time,  paper, 
and  ink.  But  give  the  same  equipment  to  an  expert,  Bud 
Fisher,  for  instance,  and  the  pen  marks  are  converted  into 
the  amusing  characters  of  Mutt  and  Jeff.  Will  his  act  be 
productive?  Apply  the  test:  society,  through  the  news- 
papers as  middlemen,  is  paying  this  cartoonist  a  high 
salary,  his  product  gratifies  desires,  and  that  is  the  end  of 
production.  In  a  cartoon  the  author  had  Jeff  claim  ex- 
emption from  service  in  the  European  War.  The  officer 
questioned,  and  Jeff  answered,  as  follows:  "Does  a  wife 
depend  on  you?"  "No."  "Children?"  "No."  "Rel- 
atives?" "No."  "Then  upon  what  grounds  do  you 
claim  exemption;  who  does  depend  on  you?"  "Bud 
Fisher."  The  idea  here  expressed  is  literally  true.  The 
cartoonist  produces  and  markets  his  product  for  a  living. 
He  is  productive  in  the  same  sense  that  the  farmer  is  pro- 
ductive. To  produce  is  to  provide  the  means  for  supply- 
ing the  demands  of  the  people,  regardless  of  the  character 
of  these  demands.  Production  may  take  tangible  form  or 
it  may  not.     The  thing  produced  is  desirability  whether  it 


340  Introduction  to  Economics 

be  in  the  form  of  a  skirt-dance  or  of  a  loaf  of  bread.  But 
it  should  be  emphasized  that  the  large  portion  of  pro- 
ductive enterprise  has  to  do  with  tangible  commodities. 
Science  has  demonstrated  the  inability  of  man  to  add  or 
detract  a  single  atom  of  matter;  production  must,  there- 
fore, concern  itself  with  such  changes  in  matter  as  will 
create  desirabilities  and  utilities  in  things.  Such  changes 
consist  in  giving  a  proper  composition  to  things,  of  putting 
them  in  such  form,  time,  and  place  that  they  may  serve 
the  desires  and  real  needs  of  the  people. 

9.  Social  production  refers  to  amount  rather  than  to 
price.  It  has  been  pointed  out  that  social  production  is 
not  the  creation  of  price  gain.  It  is  not  true  that  produc- 
tion is  always  the  response  to  price-paying  disposition. 
Value  and  price  are  high  in  proportion  to  the  scarcity  of 
goods,  that  is,  in  proportion  to  the  niggardliness  of  produc- 
tive capacity.  The  high  price  of  goods  and  limited  pro- 
duction of  them  are  almost  convertible  terms.  Social  pro- 
duction is  great  to  the  extent  that  the  output  approaches 
the  stage  of  free  goods. 

10.  Individualistic  and  Social  View-Points. — Individual- 
istic or  competitive  production  must  not  be  confused  with 
social  production.  The  individual  may  grow  wealthy  at 
the  expense  of  society.  He  may  (if  a  monopolist)  with- 
hold or  destroy  a  portion  of  his  supply  in  order  to  raise  the 
price  of  the  remaining  portion.  In  any  case,  his  one  in- 
terest is  to  get  the  highest  price.  His  interest  oftentimes 
runs  counter  to  the  interest  of  society;  the  competitor  in 
the  refining  of  sugar  would  like  to  see  the  failure  of  every 
refinery  excepting  his  own. 

The  interest  of  society  lies  in  the  production  of  general 
abundance.     Since  the  economic  welfare  of  all  is  the  pri- 


The  Organization  of  Production  341 

mary  problem,  the  economist  must  concern  himself  pri- 
marily with  social  production.  But  although  the  view- 
points of  social  and  private  production  differ,  it  does  not 
follow  that  a  system  of  private  or  competitive  production 
works,  on  the  whole,  contrary  to  the  public  interest.  On 
the  contrary,  experience  demonstrates  the  reverse  of  this, 
and  throughout  the  civilized  world  competitive  production 
has  been  adapted  as  the  means,  or  rather  as  the  form  of 
productive  organization,  to  secure  the  largest  social  pro- 
duction. 

In  other  words,  society  as  a  whole,  through  the  agency 
of  governments,  is  master  and  manager  of  its  productive 
machinery.  There  are  different  ways  in  which  this  ma- 
chinery may  be  organized  and  society  will  adopt  the  man- 
ner which  the  majority  believes  will  yield  the  largest  social 
production.  And  at  the  present  it  has  chosen  the  private 
or  competitive  form  of  organization.  Competitive  produc- 
tion is  to  be  regarded  as  a  means  to  that  which  is  first, 
foremost,  and  primary  in  consideration — social  production. 
The  economist  who  rests  his  case  with  a  discussion  of  com- 
petitive production  does  not  grasp  the  problem,  mistakes 
the  means  for  the  end,  cannot  see  the  town  for  the  houses. 

Private  production  is,  in  nature,  acquisitive;  its  com- 
mand is  to  acquire  possession  of  that  which  will  buy  or 
otherwise  obtain  from  others  the  objects  of  individual  de- 
sire. To  get  possession  is  the  individual  producer's  idea  in 
competitive  production.  Social  production  asks  not  who 
owns,  but  what  new  desirabilities  and  utilities  are  created? 
It  consists  in  so  changing  materials  by  compounding,  shap- 
ing, or  placing  them  in  time  and  location  as  to  create  in 
society  new  utilities  and  desirabilities.  It  consists  further 
in  rendering  services  which  do  not  take  material  form. 


342  Introduction  to  Economics 

The  productive  system,  above  described,  operates  under 
the  guidance  of  the  entrepreneur. 

ii.  The  Entrepreneur.— The  French  term,  entrepreneur, 
has  a  meaning  very  similar  to  that  of  the  English  words 
undertaker  or  enterpriser.  Many  authors  prefer  to  use 
one  or  the  other  of  the  English  terms,  but  these  are  in 
common  use  in  the  street  and  market-place,  and  are  there- 
fore encumbered  with  different  shades  of  meaning— we 
think  of  the  undertaker  as  a  funeral  director,  and  of  the 
enterpriser  as  some  type  of  adventurer.  The  entrepreneur 
may  be  one  man  or  many,  may  make  an  income  or  may 
not,  may  own  capital  or  may  not,  may  perform  the  several 
tasks  in  his  business  or  may  hire  others  to  do  them.  The 
word  entrepreneur  is  a  title  (as  is  sheriff,  minister,  or  presi- 
dent) ,  which  is  given  to  the  person  or  persons  who  perform 
a  particular  set  of  functions.  What  are  the  functions  of 
the  entrepreneur? 

12.  Functions  of  the  Entrepreneur.— Upon  his  own  ini- 
tiative and  at  his  own  risk  the  entrepreneur  assumes  the 
ownership  and  mastery  of  a  business.  This  may  be  a  newly 
promoted  business  or  an  old  and  established  business.  A 
business  is  an  opportunity  harnessed  or  so  correlated  with 
industrial  agents  as  to  be  productive.  The  entrepreneur  is 
the  central  figure  in  production  who  correlates  the  agen- 
cies of  production  and  acquisition;  labor  comes  to  him  for 
employment,  and  all  forms  of  wealth  come  to  him  for  di- 
rection and  utilization.  Entrepreneurs  determine  what  and 
how  much  shall  be  produced,  hire  workmen,  and  determine 
what  they  shall  do,  borrow  money  and  invest  it. 

The  entrepreneur's  relations  with  others  are  contractual 
in  nature;  he  pays  wages  and  salaries  according  to  con- 
tract, the  interest  paid  for  capital,  the  rent  or  hire  paid 


The  Organization  of  Production  343 

for  other  productive  agents,  the  price  paid  for  raw  mate- 
rials, and  all  of  his  other  costs  which  go  to  other  people 
are  paid  according  to  contract.  He  has  other  costs  which 
are  not  contractual,  such  as  the  rendering  of  his  own  ser- 
vices (wages  relinquished)  and  the  interest  which  must  be 
allowed  for  his  own  capital  invested  in  the  business.  When 
he  sells  the  product  and  subtracts  all  his  costs  the  net 
residue  is  termed  profits. 

13.  The  Entrepreneur  is  a  Self -Employed  Middleman. 
— He  buys  to  sell  at  a  profit.  The  jobber  in  the  line  of 
food  products  is  an  entrepreneur  who  buys  commodities 
in  bulk;  he  sorts,  packs  the  products  according  to  grade, 
prepares  the  goods  for  the  market,  receives  orders,  and 
sells  if  fortunate  at  a  price  sufficient  to  cover  all  costs  and 
leave  a  fair  profit. 

It  has  been  a  much-debated  question  as  to  whether  the 
directors  of  boarding-houses,  hotels,  restaurants,  and  cafes 
are  middlemen.  These  directors,  together  with  wholesale 
houses,  have  taken  the  affirmative,  have  insisted  that 
these  institutions  are  intermediary  agencies  in  the  same 
sense  as  are  retail  grocerymen,  and,  therefore,  should  have 
the  benefit  of  wholesale  prices.  Retail  grocerymen  have 
taken  the  negative,  insisting  that  eating-places  must  be 
regarded  as  final  consumers,  that  wholesalers  must  not 
supply  them,  that  this  profitable  field  must  be  left  for  the 
retailer.  But,  in  fact,  there  is  no  room  for  argument,  for 
just  as  the  retailer  buys  meats  and  cuts,  prepares,  and  dis- 
tributes them  to  the  trade,  or  as  he  buys  coffee,  grinds,  pre- 
pares, and  distributes  it,  so  the  hotel  proprietor  buys  goods, 
prepares,  and  distributes  them  to  the  trade.  Both  must 
undergo  the  costs  of  maintaining  a  place  of  business,  of 
paying  for  food  products,  of  hiring  help,  of  preparing  and 


344  Introduction  to  Economics 

selling.  Both  as  self-employed  middlemen  for  a  profit  are 
entrepreneurs. 

The  factory-owner  as  entrepreneur  is  a  self-employed 
middleman  who  buys  raw  materials  and  undergoes  the 
costs  of  preparing  and  selling  them,  in  the  form  of  finished 
goods,  to  the  trade  for  a  net  gain.  He  may  buy  iron  ore 
and,  through  several  processes,  convert  it  into  steel  prod- 
ucts of  different  forms  and  shapes  to  suit  his  purpose;  may 
buy  logs  and  convert  them  into  handles,  spokes,  axles,  and 
so  on  to  suit  his  need;  may  buy  paint  ingredients  and  com- 
pound them  into  durable  form  and  bright  color — -when  all 
is  done  and  the  different  parts  assembled,  these  crude  ma- 
terials will  have  taken  the  finished  form  of  wagon,  mow- 
ing-machine, or  what-not  that  he  cared  to  produce. 

As  middleman,  or  in  the  capacity  of  entrepreneur,  he  is 
owner  of  the  materials  he  handles.  If  as  entrepreneur  this 
man  uses  his  own  money,  we  may  say  that  in  a  sense  he 
borrows  it  from  himself  in  his  other  capacity  as  a  capital- 
ist. And  he  must  count  this  interest  relinquished  as  a 
cost  equal  to  that  which  he  would  secure  in  the  capacity  of 
a  capitalist,  should  he  loan  this  money  to  another.  With 
this  capital  (owned  or  borrowed)  he  constructs  a  plant, 
rents  land  and  other  needed  agencies,  buys  equipment, 
hires  labor,  and  lays  in  raw  materials.  All  these  outlays 
are  money  prices  paid  for  the  services  of  men,  for  the  use 
of  capital  and  other  agents,  and  for  the  raw  materials 
bought  outright.  These  things  and  services  are  his  own 
private  property  to  do  with  as  he  will  for  such  time  as  he 
has  contracted  and  paid  for  them. 

14.  The  Entrepreneur  as  Servant  of  Demand. — This  in- 
troduces another  point:  though  independent  owner,  with 
the  liberty  to  dispose  of  his  possessions  at  will,  is  not  his 


The  Organization  of  Production  345 

course  of  action,  after  all,  determined  for  him  rather  than 
by  him  ?  I  answer,  it  is.  His  business  is  a  privately  owned 
public  intermediary  through  which  the  forces  of  supply 
and  demand  operate.  If  a  change  in  season  lowers  the 
demand  for  straw  hats,  the  cheapening  effect  is  passed 
back  to  the  entrepreneur,  who,  in  turn,  passes  it  back,  in 
the  form  of  lower  prices,  to  the  earlier  producers  who 
furnish  raw  materials.  These  will  diminish  their  output, 
and  finally  cease  producing  if  the  prices  they  receive  be- 
come less  than  their  costs.  This  will  be  true  of  every 
commodity  which  becomes  unfavorably  affected  by  changes 
in  styles,  seasons,  or  by  the  substitution  of  other  goods. 
If  on  the  supply  side  favorable  weather,  new  inventions, 
improved  methods,  or  new  discoveries  of  raw  materials, 
should  lower  the  costs  of  output,  this  cheapening  effect 
is  passed  to  the  entrepreneur  and,  through  him,  trans- 
mitted to  consumers  in  the  form  of  lower  prices. 

The  entrepreneur  is  servant,  not  master,  of  these  natural 
forces  of  demand  and  supply.  His  ability  to  forecast 
changes  and  make  contracts  to  take  advantage  of  them 
is  his  source  of  profits.  Changing  demands  affect,  through 
the  medium  of  entrepreneurs,  corresponding  changes  in 
the  organization  of  productive  agencies.  But  the  output 
of  these  agencies  is  restricted  because  the  agencies  are 
themselves  limited.  The  equating-point  between  supply 
and  demand  is  price.  Thus  the  entrepreneur  fixes  prices 
and  determines  what  shall  and  what  shall  not  be  produced 
only  in  the  sense  that  he  is  a  self-employed  agent  to  direct 
the  operations  of  the  limited  productive  agents  to  meet 
the  demands  of  consumers. 

15.  The  Uses  of  Materials. — We  have  seen  that  produc- 
tion is  used  in  two  senses — competitive  or  acquisitive,  and 


346  Introduction  to  Economics 

social.  To  get  purchasing  power,  by  creating  it  or  other- 
wise, is  the  competitor's  aim.  His  selfish  aim,  however, 
generally  redounds  to  the  public  welfare.  Social  produc- 
tion works  to  the  end  of  greater  abundance.  The  indi- 
vidual with  purchasing  power  may  remain  idle  and  buy 
what  others  produce.  But  society,  taken  as  a  whole,  must 
produce  or  starve. 

Material  production  creates,  as  above  stated,  not  an 
atom  of  matter,  but  new  uses  in  things.  A  few  examples 
will  make  this  clear.  The  pen  is  one  thing,  and  the  uses 
which  flow  from  it  is  another.  Apples  are  one  thing,  the 
tree  or  agency  giving  them  another.  In  the  economic 
sense  the  difference  between  a  draft-horse  and  a  dead  horse 
is  that  one  can  and  the  other  cannot  give  off  uses.  All 
that  one  wants  with  a  house  is  the  uses  it  will  bear.  No 
one  would  pay  for  a  house  located  in  a  desert  or  polar 
region  beyond  the  reach  of  man.  A  sunken  ship  at  the 
bottom  of  the  sea  may  be  as  physically  perfect  as  the 
swift  French  liner,  Rochambeau,  yet  it  could  command 
not  a  penny  in  exchange.  The  only  difference  between 
gold  in  the  moon  and  gold  in  a  national  bank  is  that  one 
is  worth  zero  and  the  other  one  hundred  cents  on  the  dol- 
lar— and  this  solely  because  the  one  is  at  the  proper  place 
to  render  uses,  whereas  the  other  is  not.  It  is  wholly  be- 
cause of  the  uses  of  things  that  they  have  desirabilities 
and  utilities. 

1 6.  Direct  and  Indirect  Uses  of  Money. — The  coal-mine, 
the  well  of  water,  the  storage  plant  full  of  goods,  and  the 
money-bag  contain  uses  in  the  form  of  goods  which  they 
yield  up  at  the  will  of  man.  Likewise  the  tree,  the  horse, 
the  farm,  and  the  engine  contain  uses  in  the  form  of  apples, 
services,  crops,  and  power  which  they  yield  up  at  the  will 


The  Organization  of  Production  347 

of  man.  All  economic  goods  or  agents  contain  uses  either 
actually  or  potentially,  and  it  is  for  this  reason,  and  this 
only,  that  we  value  them,  work  to  produce  them,  and  deny 
ourselves  to  save  them.  Be  it  remembered,  the  only 
reason  why  we  care  for  goods,  why  we  undergo  hardship 
for  them,  why  we  value  and  price  them,  is  the  uses  which 
they  actually  or  potentially  contain  and  will  surrender  to 
our  needs. 

As  the  years  come  and  pass  out  during  the  life  of  man, 
so  with  his  desires.  And  he  must  make  provision  to  meet 
the  desires  that  will  be,  as  well  as  those  that  are.  The 
uses  of  durable  agents  ripen  through  time.  No  ingenuity 
can  get  all  the  uses  of  the  field  in  any  one  year,  but  its 
potential  uses  become  actual  as  time  passes  and  needs 
arise.  As  we  sever  the  maturing  coupon  from  the  bond  at 
the  interest-paying  date,  so  we  must  await  the  proper  sea- 
son to  sever  grass  from  the  field  and  fruit  from  the  tree. 
Productive  agents  mature  their  yields  in  recurring  order: 
The  fleece  of  the  sheep  and  the  crop  of  the  field  recur  annu- 
ally, milk  from  the  cow,  and  eggs  from  the  nest  recur  daily. 
What  the  bond  is  to  the  coupons  attached,  productive 
agents  are  to  their  recurring  yields.  And  as  the  bond  is 
priced  according  to  the  number,  size,  and  maturing  date 
of  its  attached  coupons,  so  durable  agents,  the  parent 
stems  of  future  yields,  are  priced  according  to  the  number, 
size,  and  maturing  date  of  their  recurring  uses.  In  capital- 
izing durable  agents,  we  are,  so  to  speak,  pricing  the  ser- 
vices locked  up  in  them. 

We  capitalize  these  services  whether  direct  or  indirect. 
Clothing  is  valuable  for  the  warmth  it  yields,  wool  for  the 
clothing  it  makes,  sheep  for  the  wool  they  produce,  and 
pastures  for  the  feed  they  supply.     The  steaming  cup  of 


348  Introduction  to  Economics 

coffee  has  direct  uses  in  the  hands  of  the  final  consumer, 
but  a  moment  previous  to  that  they  belonged  to  the  res- 
taurant-keeper, and  were  to  him  what  a  hoe  is  to  a  farmer 
— simply  a  means  of  obtaining  a  livelihood.  As  such  they 
were  an  agency  or  means  of  getting  something  else;  that 
is  to  say,  indirect. 

Note  further:  it  took  heat,  pot,  water,  and  coffee-grain 
to  make  that  cup  of  coffee.  The  uses  of  these  several 
agents  were  compounded  into  one  final  use.  And  these 
several  uses  were  themselves  the  joint  product  of  different 
agents;  as  such  they  were  compound  uses.  The  agents 
producing  them  worked  successively  as  land,  coffee-tree, 
coffee-grain,  transportation  facilities,  grinding-mill,  middle- 
man, and  so  on.  In  this  case  the  land  uses  are  most  in- 
direct. Thus  the  productive  process  proceeds  from  sim- 
ple uses  to  compound,  and  from  most  indirect  to  direct. 
The  productive  agents  work  successively  and  simultane- 
ously in  transforming  indirect  into  direct  uses. 

With  the  development  of  civilization  production  takes  a 
more  circuitous,  roundabout,  or  indirect  method.  In  at- 
tempting to  analyze  this  process  the  older  economists 
attempted  to  classify  concrete  material  agents  as  direct 
and  indirect.  Their  labors  were  in  vain;  they  might  as 
well  have  reasoned  regarding  a  perpetual  motion.  All  the 
uses  of  a  hoe  are  indirect  and  it  may  be,  therefore,  an  in- 
direct good.  The  uses  of  bread  at  the  time  of  final  con- 
sumption are  direct  and,  at  that  time,  bread  is  a  direct 
good.  But  other  goods  render  both  direct  and  indirect 
uses  at  the  same  time. 

As  an  ornament  pleasing  to  the  eye,  Velvet  Joe's  big 
pipe  bears  direct  uses,  but  as  a  means  to  the  pleasure  de- 
rived from  the  "glowing  weed"  it  is  an  indirect  good. 


The  Organization  of  Production  349 

The  train  carrying  both  freight  and  travellers  for  pleasure 
is  rendering  both  kinds  of  uses. 

The  purpose  of  the  owner  makes  goods  both  direct  and 
indirect.  The  farm  wife  has  two  buckets  of  milk,  alike  in 
all  respects;  she  will  use  the  one  directly  and  fatten  the  pig 
with  the  other. 

The  same  good  may  be  direct  at  one  time  and  indirect 
at  another.  If  you  ride  the  horse  his  services  are,  for  the 
time,  direct,  but  if  you  hitch  him  to  the  plow,  his  ser- 
vices are  indirect — an  agent  to  get  a  crop.  The  uses  of 
goods  may  be  classified  as  direct  and  indirect,  but  goods 
themselves  cannot  be  so  classified.  We  think,  deal  in,  and 
appraise  goods  according  to  their  uses,  therefore  there  is  no 
significance  in  a  classification  of  goods  were  this  possible. 

17.  The  agencies  which  the  entrepreneur  uses  for  pro- 
ducing these  desirable  changes  in  materials  are  of  many 
kinds  and  used  for  many  purposes. 

(a)  Composition:  All  are  familiar  with  certain  agencies 
for  compounding  materials  so  as  to  add  to  their  uses. 
Among  these  agencies  are  the  materials  used  in  making 
medicines,  explosives,  liquors,  in  cooking  foods,  in  con- 
verting iron  into  steel  or  hides  into  leather.  All  chemical 
and  biological  agencies  are  of  this  class,  which  alter  the 
chemical  content  and  material  composition  of  things. 

(b)  Form:  A  change  in  form,  such  as  converting  a  briar- 
root  into  a  pipe  or  a  log  into  a  piano-case,  does  not  involve 
a  chemical  or  organic  change  in  matter.  The  lace-knitting 
machine  that  arranges  gossamer  into  fantastic  shapes,  ma- 
chines for  spinning,  weaving,  tools  that  extract  coal  from 
the  mine,  stone  from  the  quarry,  and  water  from  the  well, 
form  implements  to  gather  grain,  dig  ditches,  and  split 
rails — these  are  agencies  for  changing  the  form  of  things. 


350  Introduction  to  Economics 

(c)  Place:  Every  transporting  agent — cart,  horse,  train, 
hod-carrier,  or  other — that  removes  a  thing  from  a  place 
where  it  has  little  use  to  where  it  is  more  needed,  is  a 
productive  agent  adding  to  the  desirabilities  of  materials. 

(d)  Time:  There  are  agencies  which  add  to  the  uses  of 
things  by  preserving  them  to  such  time  as  they  are  most 
needed.  Granaries,  cellars,  cold-storage  plants,  jars  for 
canning,  and  other  preservative  agencies  are  exemplary. 
Also,  there  are  agencies  for  producing  things  before  their 
normal  season,  for  instance,  greenhouses,  ice-factories,  and 
incubators. 

All  these  agencies  may  play  a  part  in  furnishing  the 
same  good.  There  is  a  change  in  composition  when  ice 
is  frozen,  a  change  in  form  when  it  is  cut  into  cakes,  a 
change  in  place  when  it  is  put  into  the  ice-house,  a  change 
in  time  when  kept  until  the  warm  summer  months. 

18.  Exercises. — i.  Operations  of  nations  which  are  at 
war  are  carried  on  successively  and  simultaneously,  and  the 
same  may  be  said  with  respect  to  the  operations  of  indus- 
tries in  times  of  peace.  Explain  fully  the  meaning  of  this 
statement. 

2.  What  is  meant  by  the  statement  that  industries  are 
established  in  obedience  to  the  demands  of  the  people? 

3.  What  is  meant  by  the  automatic  adjustment  of  in- 
dustries to  one  another  throughout  society  ? 

Is  such  adjustment  made  upon  a  physical  basis  or  upon 
a  basis  of  profits  ? 

4.  Would  it  be  correct  to  say  that  there  is  always  a  ten- 
dency toward  a  complete  adjustment  of  industries  to  one 
another,  but  that  such  adjustment  is  never  fully  attained  ? 

If  the  statement  is  correct  explain  why  such  adjustment 
is  never  reached. 

5.  Why  does  the  extensive  introduction  of  machinery 
into  industry  bring  about  quantitative  precision? 


The  Organization  of  Production  351 

6.  What  forces  are  now  operative  in  industry  that  cause 
the  services  of  men  to  be  standardized? 

7.  Define  production.  Is  the  test  of  production  material- 
ity of  result  ?     Commendability  of  result  ?     Useful  service  ? 

8.  Is  a  franchise  productive?  The  lawyer  who  gets 
guilty  men  acquitted?  A  counterfeiter?  A  whiskey- 
maker  ?  A  painter  of  obscene  pictures  ?  A  roulette- table  ? 
A  burglar's  jimmy  ?     A  burglar  ?     Explain.     (Davenport.) 

9.  What  are  the  functions  of  the  entrepreneur? 

Is  the  entrepreneur  in  a  large  factory  the  manager? 
The  board  of  directors  ?     The  stockholders  ? 

10.  Can  the  entrepreneur  tell  how  much  he  can  afford 
to  pay  for  the  use  of  a  factor  ?  Is  this  the  same  as  telling 
what  its  separate  service  is?  How  may  a  thing  in  its 
actual  use  cost  the  entrepreneur  more  than  he  pays  to  get 
it?     (Davenport.) 

11.  If  entrepreneurs  generally  get  more  skilful,  what 
is  the  effect  on  their  profits  ?  On  the  wages  of  laborers  ? 
(Davenport.) 

12.  An  economic  good,  such  as  a  pen,  a  horse,  a  car,  or 
a  food-product,  cannot  be  classified  for  all  purposes,  either 
as  a  direct  or  as  an  indirect  good.     Why  is  this  so  ? 

13.  They  are  only  the  economic  uses  of  goods  which 
may  be  classified  as  direct  or  indirect.  Explain  this 
statement. 


CHAPTER  XVI 
THE  LAW  OF  PROPORTIONALITY 

i.  Complementary  agents.  2.  The  principle  of  resistance.  3.  Physical 
intensive  utilization.  4.  Turgot's  statement.  5.  These  facts  expressed  in 
money  terms.  6.  Intensive  margin  of  utilization.  7.  Extensive  margin  of 
utilization.  8.  What  lands  or  land  uses  are  cultivated?  9.  Equality  of 
intensive  and  extensive  margins.  10.  Substitution.  11.  The  law  of  pro- 
portionality. 12.  Bearing  of  proportionality  on  the  distribution  of  wealth. 
13.  How  the  price  of  agents  affects  proportionality.  14.  The  elastic  limit 
of  factors.  15.  Extent  of  market.  16.  Quantity  and  money  returns.  17. 
Summary  conclusion.     18.  Exercises. 

i.  Complementary  Agents. — When  agents  unite  or  work 
together  in  performing  a  function,  they  complement  or  fill 
out  each  other  and  are  called  complementary  agents.  For 
instance,  the  boiler  is  worthless  without  the  engine,  and 
the  locomotive  is  valueless  without  the  track.  The  wheel 
and  belt  complement  each  other,  and  so  with  saw  and 
carriage,  soap  and  water,  knife  and  fork,  lock  and  key.  A 
group  of  complementary  goods  is  valued  as  a  whole;  if  the 
hook  is  missing  the  eye  is  worthless,  and  the  hook  will  be 
worth  the  same  as  both  hook  and  eye. 

In  a  study  of  the  technical  productive  process,  we  are 
studying  the  best  quantitative  relationship  of  complemen- 
tary agents.  All  such  agents  employ  or  make  necessary 
the  use  of  others.  As  each  member  of  a  baseball  nine  com- 
plements every  other  member  in  the  co-operant  group  of  a 
well-balanced  team,  so  the  building,  land,  raw  materials, 
labor,  and  varied  parts  of  technological  equipment  comple- 
ment each  other  and  become  one  large  composite  produc- 
tive agent. 

352 


The  Law  of  Proportionality 


353 


Any  product — whether  it  be  shoes,  loaf,  cloth,  hat — is 
the  product,  not  of  one,  but  of  a  number  of  agents  work- 
ing together.  Pens  alone  cannot  write;  they  must  com- 
bine with  ink,  paper,  operator.  Land  alone  cannot  pro- 
duce wheat;  it  must  combine  with  water,  seed,  labor,  and 
tools.  There  could  be  no  ride  in  the  automobile  were  a 
wheel  missing,  or  the  engine  out  of  repair,  or  the  gasolene 
wanting,  or  the  chauffeur  absent — each  complementary 
agent  must  contribute  its  bit  in  the  production  of  a  good 
or  service. 

2.  The  Principle  of  Resistance. — Productive  agents  will 
not  render  their  services  gratuitously;  they  resist  our 
efforts  to  compel  them  to  supply  our  needs.  And  the 
more  effort  we  exert  upon  an  agent  the  greater  this  resist- 
ance becomes.  In  order  to  grasp  the  significance  of  this 
principle  it  is  necessary  to  hold  two  things  in  mind:  a  lim- 
ited agent  and  static  conditions. 

A  given  area  of  land  will  yield  more  and  more  as  more 
and  more  labor,  tools,  and  seed  are  applied  to  it.  But 
while  the  total  yield  from  this  land  is  increasing,  the  re- 
turns per  unit  of  expenditure  upon  it  will  diminish.  The 
resistance  of  the  land  will  increase  with  the  increased 
pressure  upon  it  for  more  products.  This  may  be  illus- 
trated as  follows: 


LIMITED   AREA   WORKED 

By  i  man  yields  15  bushels,  or  15  bushels  per  man 


"    2  men 

« 

40 

(i 

a 

20 

C                (( 

cc 

"    3     " 

<( 

54 

(i 

ti 

18          ' 

(           {( 

cc 

"    4    « 

« 

56 

(( 

cc 

14 

1           cc 

cc 

11     5    « 

«< 

60 

(i 

tt 

12           ' 

I           cc 

tt 

"    fi    « 

«« 

66 

« 

cc 

II 

I          (« 

te 

1 

"    7    " 

«c 

66>^ 

u 

cc 

9lA   ' 

I               (C 

«« 

354  Introduction  to  Economics 

This  illustration  shows  that  two  men  are  the  most  appro- 
priate number  to  work  this  specific  tract  of  land  in  order 
to  get  the  highest  commodity  return  per  man.  At  this 
point  begins  increasing  resistance  on  the  part  of  the  land 
to  the  further  application  of  labor.  The  commodity  re- 
turns to  each  successive  laborer  grow  less  and  less. 

What  is  true  of  land  is  true  of  other  productive  agents. 
If  a  manufacturer  installs  too  much  machinery,  a  part  of 
it  will  be  habitually  idle.  The  other  portions  of  his  plant 
are  too  small  to  employ  fully  the  machinery;  too  much 
machinery  is  applied  to  the  other  portions  of  the  plant,  or, 
what  is  the  same,  too  little  of  other  things  is  applied  to  the 
machinery.  Machinery  is  the  long  factor,  other  factors  are 
short.  Because  of  the  increasing  resistance  on  the  part  of 
the  short  factors,  the  physical  or  commodity  returns  to 
each  additional  machine  grow  less  and  less.  If  the  build- 
ing is  the  long  factor  each  foot  of  idle  space  is  physically 
an  excess  and  is,  when  translated  into  price  terms,  carried 
as  an  unnecessary  cost.  Again,  an  excessive  office  force 
makes  this  the  long  factor,  and  the  resistance  to  further 
production  on  the  part  of  the  short  factors  causes  a  dimin- 
ishing return  of  the  physical  product  for  each  addition  to 
the  office  force. 

If  there  were  no  physical  resistance  on  the  part  of 
agencies  to  produce,  one  hammer  would  drive  all  the  nails 
in  the  community;  one  farm  would  feed  the  world;  one 
laborer  could  do  all  the  work;  one  productive  agent  along 
any  line  would  be  a  national  supply. 

Resistance  limits  the  supply  of  products  coming  from 
any  one  agent.  Thus  resistance  is  the  cause  of  the  scarcity 
and  consequently  the  price  of  commodities.  The  greater 
the  resistance  of  a  productive  agent,  the  greater,  of  course, 
is  the  cost  of  getting  additional  uses. 


The  Law  of  Proportionality  S55 

3.  Physical  Intensive  Utilization. — If  we  take  a  limited 
agent,  as  a  planing-mill,  it  will  become  the  short  factor  as 
we  add  more  and  more  to  the  labor  force,  to  building,  to 
other  machinery,  and  to  raw  materials.  This  short  factor 
becomes  unable  to  back  up  the  longer  factors,  and  they 
produce  a  diminishing  commodity  return.  It  may  be  pos- 
sible to  get  still  further  uses  from  the  planing-mill  by 
working  it  more  intensively,  but,  to  speak  in  terms  of  price, 
the  resistance  may  be  such  that  the  cost  of  harnessing 
further  uses  from  the  machine  will  outweigh  the  price  of 
such  uses. 

Getting  more  and  more  commodity  returns  from  any 
agent — farm,  engine,  horse,  laborer,  house,  or  other — by 
applying  more  of  other  things  to  it  is  called  physical  inten- 
sive utilization. 

4.  Turgot's  Statement. — The  early  resistance  of  an 
agent  is  comparatively  difficult  to  overcome.  Productive 
agents  are  "like  a  spring  which  is  forced  to  bend  by  being 
loaded  with  a  number  of  equal  weights  in  succession.  If 
the  weight  is  light  and  the  spring  is  not  very  flexible,  the 
effect  of  the  first  load  might  be  almost  nil.  When  the 
weight  becomes  sufficient  to  overcome  the  first  resistance, 
the  spring  will  be  seen  to  yield  perceptibly  and  to  bend; 
but,  when  it  has  bent  to  a  certain  point,  it  will  offer  greater 
resistance  to  the  force  brought  to  bear  on  it,  and  a  weight 
which  would  have  made  it  bend  an  inch  will  no  longer 
bend  it  more  than  half  a  line."1  And  the  same  noted 
author  goes  on  to  remark  on  the  cultivation  of  the  soil  as 


1  This  was,  I  believe,  the  first  illustration  of  the  principle  by  an  economist. 
It  was  written  about  1768  by  A.  R.  F.  Turgot,  on  a  prize  essay  submitted 
to  him,  See  Cannan's  Theories  of  Production  and  Distribution,  pp.  147- 
148. 


356  Introduction  to  Economics 

follows:  "If  it  were  once  tilled  the  produce  will  be  greater; 
tilling  it  a  second,  a  third  time,  might  not  merely  double  and 
triple,  but  quadruple  or  decuple  the  produce,  which  will 
thus  augment  in  a  much  larger  proportion  than  the  ad- 
vances increase,  and  that  up  to  a  certain  point,  at  which 
the  produce  will  be  as  great  as  possible  compared  with  the 
advances.  Past  this  point,  if  the  advances  be  still  in- 
creased, the  produce  will  still  increase,  but  less,  and  always 
less  and  less  until  the  fecundity  of  the  earth  being  ex- 
hausted, and  art  unable  to  add  anything  further,  an  ad- 
dition to  the  advances  will  add  nothing  whatever  to  the 
produce." 

This  illustration  shows  that  the  initial  resistance  of 
agents  is  strong,  that  after  the  initial  advances  are  made 
resistance  grows  less  and  less  up  to  a  point  (maximum 
commodity  returns)  where  it  again  grows  stronger  and 
stronger  as  further  advances  are  made. 

5.  These  Facts  Expressed  in  Money  Terms. — The  facts 
brought  out  by  this  study  of  the  physical  adjustment  of 
factors  relative  to  commodity  returns  may  be  expressed 
in  terms  of  money  cost  and  price  returns.  Put  differently, 
an  agent  gives  off  few  uses  for  the  first  expenditures  upon 
it,  after  which  it  gives  off  more  uses  per  unit  of  expenditure 
up  to  a  point  where  it  begins  to  give  less  and  less  money 
returns  for  each  additional  expenditure.  The  entrepre- 
neur will  not  make  further  expenditures  upon  an  agent 
when  the  point  is  reached  where  the  use  given  off  by  the 
agent  is  no  larger  than  the  expenditure  made  to  get  it. 
This  point,  where  the  price  of  the  income  from  an  agent  is 
no  larger  than  the  outgo  to  get  it,  is  called  the  intensive 
margin  of  utilization.  It  marks  the  edge,  point,  or  mar- 
gin at  which  the  utilization  of  the  agent  will  cease. 


The  Law  of  Proportionality  357 

6.  Intensive  Margin  of  Utilization. — Land  is  intensively 
cultivated  by  erecting  higher  buildings  upon  it,  or  by  dig- 
ging further  down  into  it,  or  by  any  other  means  which 
tends  to  get  more  and  more  returns  from  it.  But  there  is 
a  definite  economic  limit  to  the  height  of  building,  or  to 
the  depth  of  digging,  or  to  the  care  of  cultivation.  We 
stop  at  the  point  where  loss  would  be  incurred  by  going 
further,  where  the  increasing  cost  comes  to  equalize  the 
diminishing  price  return,  or,  in  other  words,  at  the  margin 
of  intensive  cultivation.  A  use  is  valueless  which  would 
be  worth  no  more  than  the  cost  of  harnessing  it.  Then, 
the  marginal  uses  of  an  agent  are  valueless,  but  man  will 
undergo  no  effort  for  a  valueless  use,  therefore  marginal 
uses  are  not  cultivated.  Theoretically,  cultivation  ex- 
tends down  to,  but  does  not  attempt  to  harness  the  uses 
on  or  below  the  intensive  margin. 

7.  Extensive  Margin  of  Utilization. — It  was  the  princi- 
ple of  resistance  in  the  cultivation  of  land  which  caused 
Abraham  to  depart  from  Lot.  "The  land  was  not  able 
to  bear  them,  that  they  might  dwell  together."  Were 
there  no  principle  of  resistance  in  land,  a  small  area  would 
provide  for  all.  There  would  be  no  land  rents,  no  trans- 
portation costs,  and  every  economy  of  localized  industry 
would  be  enjoyed.  Why  migrations,  and  why  are  all  in- 
habitable parts  of  the  globe  occupied?  The  one  answer 
is  the  principle  of  the  increasing  resistance  of  land. 

If  a  colony  settles  in  a  new  country,  it  will  (fertility, 
location,  and  all  things  considered)  occupy  the  best  grades 
of  land  first.  As  the  population  increases,  or  as  foreign 
markets  develop,  or  as  increasing  standards  of  the  people 
call  forth  higher  prices  for  goods,  this  land  will  be  more 
intensively  cultivated.     Increasing  resistance  will  make  it 


358  Introduction  to  Economics 

more  and  more  difficult  to  supply  their  needs  from  this 
land.  Rather  than  cultivate  this  one  tract  at  too  large 
an  expense  it  will  be  more  profitable  to  occupy  the  next 
best  tract.  And  with  further  demands  for  land  products 
poorer  and  poorer  tracts  will  be  cultivated.  Extending 
cultivation  out  to  cover  additional  tracts  of  land  is  called 
extensive  cultivation.  The  outer  edge  or  margin  to  which 
cultivation  extends  is  the  extensive  margin  of  cultivation. 

8.  What  Lands  or  Land  Uses  are  Cultivated? — All  land 
under  cultivation  is  valuable.  Men  do  not  labor  to  har- 
ness a  valueless  use,  and  this  they  would  do  should  they 
cultivate  valueless  land.  The  heaviest  expenditures  are 
justified  only  upon  the  most  valuable  land.  One  is  marked 
as  a  poor  business  man  who  makes  lavish  expenditures 
upon  cheap  land.  The  least  valuable  land  of  all  can  com- 
mand the  least  application  of  labor  and  capital  upon  it. 
Worthless  land,  like  the  scrap-heap  machine,  is  abandoned, 
not  because  there  are  no  possible  uses  in  it,  but  because 
the  cost  of  harnessing  these  uses  would  be  more  than  they 
are  worth. 

Those  who  object  to  this  view  make  this  well-sounding 
fallacy:  "Yes,  men  will  cultivate  worthless  land,  so  long 
as  they  get  a  fair  return  from  the  capital  applied  to  it." 
This,  I  may  say,  is  the  only  point  of  any  significance  favor- 
ing the  contention  that  valueless  land  is  cultivated.  And 
it  is  easily  set  aside.  We  have  seen  in  the  reasoning  on 
complementary  agents  that  land,  tools,  seed,  and  labor 
jointly  produce.  Any  one  of  these  agents  alone  is  non- 
productive. And  a  return  from  their  joint  action  is  to  be 
attributed,  not  to  one  or  two  but  to  all  the  causal  factors. 
Why  attribute  the  whole  return  to  capital  when  land  is 
an  absolute  essential  in  production?     These  complemen- 


The  Law  of  Proportionality  3.5!) 

tary  agents  unite  into  one  composite  productive  unit,  as 
do  the  parts  of  a  clock  into  one  timepiece,  but  no  one 
would  be  so  foolish  as  to  attribute  the  time-keeping  quality 
to  the  dial,  and  value  it  to  the  exclusion  of  the  other  parts. 
Now,  the  tools,  seed,  and  labor  applied  to  this  land  are 
valuable  solely  because  of  what  they  produce,  and  for  pre- 
cisely the  same  reason  the  land  is  valuable,  for  indeed  it  is 
joint  partner  with  the  other  factors  in  producing  exactly 
the  same  thing. 

The  point  at  which  cultivation  ceases  or  the  line,  so  to 
speak,  which  marks  off  the  valuable  from  the  valueless  land, 
is  called  the  extensive  margin  of  {cultivation)  utilization. 

There  is  an  extensive  utilization  of  all  forms  of  produc- 
tive agents.  The  intensive  utilization  of  a  planing-mill 
grows  more  and  more  inconvenient  and  costly.  As  its 
resistance  increases  the  other  (long  factors)  show  diminish- 
ing returns.  This  will  justify  the  installation  of  another 
planing-mill.     And  so  for  all  productive  agents. 

9.  Equality  of  Intensive  and  Extensive  Margins. — If  a 
farmer  has  an  extra  hundred  dollars,  will  he  bring  more 
land  under  cultivation  or  more  intensively  utilize  land  now 
under  tillage  ?  His  desire  to  receive  the  largest  net  return 
will  cause  him  so  to  distribute  his  expenditures  as  to  keep 
the  two  margins  at  an  equality.  Should  the  field  inten- 
sively cultivated  offer  the  larger  returns,  it  will  pay  to 
continue  investing  upon  it  until  its  margin  is  lowered  to 
the  point  where  its  money  return  equals  that  of  the  exten- 
sive margin. 

Again,  one  attempts  to  withdraw  his  capital  from  the 
less  paying  occupation  in  order  to  invest  it  in  the  more 
remunerative  occupation.  By  withdrawing  capital  from 
where  relatively  too  much  is  employed  he  raises  the  mar- 


360  Introduction  to  Economics 

gin  and  thus  increases  the  returns  from  each  unit  of  capi- 
tal remaining  there.  And  by  applying  this  capital  to  the 
more  remunerative  field  the  margin  will  there  be  lowered 
and  the  returns  to  capital  diminished.  In  any  case,  the 
attempt  to  employ  capital  in  its  most  remunerative  em- 
ployment tends  to  equalize  the  returns  to  capital  in  all 
employments. 

10.  Substitution. — During  the  course  of  production 
entrepreneurs  find  it  necessary  to  substitute  one  thing  for 
another,  one  type  of  labor  for  another,  new  inventions  for 
old,  a  larger  machine  for  a  smaller,  or  vice  versa,  and  so  on. 
The  purpose  of  substitution  is  to  bring  about  a  better  ap- 
portionment or  adjustment  of  the  factors  of  production. 
This  is  also  concerned  with  such  problems  as  lengthening 
short  factors,  or  of  eliminating  waste  by  shortening  factors 
which  are  unnecessarily  long. 

A  certain  factor  is  found  to  hold  a  monopoly  position,  at 
times,  and  all  the  other  factors  must  be  adjusted  to  it. 
The  flow  from  a  mineral  spring  is  limited  and  the  other 
factors  employed  to  utilize  this  water  must  be  adjusted 
to  the  size  of  the  flow,  for  it  cannot  be  so  enlarged  as  to 
accommodate  itself  to  the  size  of  the  other  agents.  The 
same  idea  holds  with  respect  to  a  building  site  in  a  crowded 
city,  or  with  respect  to  a  factor  which  relatively  is  very 
costly,  or  with  respect  to  a  factor  limited  by  franchise,  or 
monopoly  right. 

To  work  out  proper  substitutions  in  order  to  maintain  a 
proper  proportion  and  balance  in  the  business  is  the  pri- 
mary problem  in  business  management.  When  such  an 
adjustment  is  reached  there  is  no  reason  for  further  sub- 
stitution, and  it  would  be  sheer  waste  to  enlarge  or  further 
improve  any  of  the  productive  factors  without  improving 


The  Law  of  Proportionality  361 

all.  But,  unfortunately,  such  an  ideal  adjustment  is  at 
best  only  temporary. 

ii.  The  Law  of  Proportionality. — We  have  now  come  to 
the  most  important  topic  in  economics.  This  law  simply 
states  facts  regarding  quantitative  relationship  from  which 
most  facts  concerning  price  relationships  are  derived. 
There  is  a  best  adjustment  of  parts  to  make  a  bridge, 
automobile,  or  machine,  and,  any  part  lacking,  the  mech- 
anism works  poorly  or  not  at  all.  There  must  be  a  proper 
mixture  of  ingredients  to  produce  a  paint,  and  a  proper 
mixture  of  paints  to  give  us  a  painting.  These  are  physi- 
cal facts  illustrative  of  physical  adjustments. 

Industry  consists  of  mental  processes  and  the  movement 
of  physical  things.  Back  of  the  existing  structure  are  the 
movements  of  materials  which  gave  it  form,  and  back  of 
these  movements  were  the  thoughts  and  plans  of  where 
and  how  to  move  these  materials.  The  principle  guiding 
these  thoughts  and  shaping  these  materials  into  finished 
structures  is  the  law  of  proportionality.  This  law  teaches 
how  to  add  to  the  serviceability  of  things  by  giving  them 
proper  combination.  The  work  of  farmers,  merchants, 
cooks,  chemists,  engineers,  transporters,  and  miners  is  to 
move  or  combine  things  so  that  natural  forces  may  operate 
to  give  desired  results.1 

There  is  an  old  saying  that  "too  much  of  a  good  thing 
is  bad."  Water  is  so  good  as  to  be  an  absolute  essential 
to  life,  but  too  much  of  it  fills  the  cellar,  floods  the  valley, 
and  makes  swamps.  No  crop  could  be  produced  without 
it,  but  too  much  of  it  destroys  the  crop.     If  a  dry  plain 

1  The  reasoning  and  some  of  the  illustrations  used  in  this  paragraph  are 
most  admirably  expressed  in,  and  are  taken  from,  Professor  Carver's  Essays 
in  Social  Justice.     See  particularly  his  chapter  XI. 


362  Introduction  to  Economics 

fails  to  produce  for  want  of  water,  a  swamp  refuses  to  pro- 
duce for  the  opposite  reason — too  much  water.  The  owner 
of  the  dry  plain  would  like  to  buy  water,  whereas  the  swamp- 
owner  would  regard  it  a  privilege  to  give  it  away.  Its 
price  or  want  of  price  depends  upon  the  physical  fact  of 
proportionality.  The  swamp-owner  reasons:  "More  water 
less  crop;  less  water  more  crop."  The  remedy  for  both  of 
these  cases  is  to  move  water;  move  it  from  places  of  abun- 
dance to  places  of  scarcity.  The  entrepreneur  constantly 
deals  with  substitutions  to  bring  about  the  proper  adjust- 
ment. The  proportions  with  which  he  deals  are  variable, 
and  a  chief  duty  of  his  is  to  redistribute  his  resources  from 
time  to  time  so  as  to  cut  down  long  factors  and  add  to  the 
short  ones.  If  he  is  a  manufacturer  of  gunpowder,  he 
knows  that  his  product  results  from  the  mixture  of  char- 
coal, saltpetre,  and  sulphur,  and  further,  that  the  short  factor 
will  be  tlte  limiting  factor. 

He  may  have  enough  charcoal  and  saltpetre  to  make 
20,000  kegs  of  powder,  but  if  he  has  only  enough  sulphur 
to  make  500  kegs,  the  short  factor — sulphur — will  limit 
his  total  product  to  500  kegs.  He  might  double  or  quad- 
ruple the  long  factors,  but  to  no  effect  on  the  final  output. 
Should  he  double  the  short  factor,  however,  the  forthcom- 
ing product  would  be  doubled.  In  this  case  the  increased 
product  would  be  attributed  to  the  short  factor.  This 
manager  could  well  afford  to  pay  a  high  price  for  sulphur, 
but  he  would  not  be  justified  in  a  large  outlay  for  the 
other  two  factors.  It  is  thus  shown  again  that  the  market 
conditions  respecting  productive  agents  are  based  upon 
the  physical  fact  of  proportionality.  Davenport's  state- 
ment, "The  ultimate  determinant  of  the  high  price  of  any 
product  is  to  be  found  in  the  scarcity  of  the  productive 


Tlie  Law  of  Proportionality  363 

factors  upon  which  the  forthcoming  of  the  product  is  con- 
ditioned." '  But  this  lacks  strict  accuracy  in  that  it  is  the 
relatively  short  factor  which  limits  supply  and  thus  ac- 
counts for  high  price. 

12.  Bearing  of  Proportionality  on  the  Distribution  of 
Wealth. — When  we  speak  of  the  distribution  of  wealth  we 
mean,  strictly  speaking,  a  distribution  of  income.  And  a 
study  of  economic  distribution  is  an  attempt  to  account 
for  the  comparative  size  of  the  shares  of  income  which  go 
to  the  different  agents  (or  their  owners)  which  produce 
the  income.  It  attempts  to  answer  the  question,  Why  do 
some  agents  get  so  much  of  the  income  while  others  get  so 
little?  All  shares  of  distribution  are  not  governed  by  the 
same  economic  principles.  With  respect  to  the  principles 
governing  them  the  shares  are  divided  into  four  classes — 
Rent,  Interest,  Profits,  and  Wages.  They  may  be  indi- 
cated with  respect  to  the  agents  producing  them  as  follows : 

Rent  *-m  Wealth      \    T,.  ,  M        (Entrepreneurs  »->•  Profits 

Interest  -*-«■  Capital/        mgS  an        en    \Laborers  ■►-*■  Wages 

For  the  sake  of  clearness  let  us  repeat  a  statement  pre- 
viously made:  The  order  of  thought  is  from  the  price 
of  the  product  to  the  price  of  the  productive  factor.  If 
the  product  is  scarce  and  high-priced,  then  a  high  price 
will  be  paid  for  the  use  of  the  productive  factor.  The 
causal  sequence  runs  from  product  to  agent;  it  never  runs 

1  Economics  of  Enterprise,  p.  435.  This  is  quoted  from  Davenport's 
chapter  VIII,  which  is  recommended  to  the  readers  of  this  book  as,  in  my 
judgment,  the  most  clear-cut  analysis  in  print  of  the  relation  of  cost  to 
value.  To  use  his  own  words  to  express  his  line  of  thought:  "The  causal 
sequence  on  the  supply  side  of  the  problem  runs  from  the  relative  scarcity  of 
the  product,  thence  to  the  relatively  high  price  of  the  product,  thence  to 
the  relatively  high  remuneration  of  the  factor"  (p.  in).  Note  his  appli- 
cation of  this  to  wages  (p.  115), 


364  Introduction  to  Economics 

in  the  opposite  direction.  If  a  productive  agent  is  very 
scarce,  it  would  be  vicious  reasoning  to  hop  directly  to  the 
conclusion  that  it  is,  therefore,  very  high-priced.  The 
order  of  thought  is:  Supply  of  productive  agent  *»->  supply 
of  product  "►"♦-  price  of  product  »-+-  and,  lastly,  to  price  of 
productive  agent. 

Because  the  scarce  factor  limits  the  product,  the  high 
price  of  the  product  will,  in  turn,  cause  a  high  price  to  be 
paid  for  the  use  of  the  short  factor.  Again,  to  increase  the 
short  factor  has  the  effect  of  increasing  the  product;  unit 
for  unit  the  short  factor  is  most  productive  and  the  long 
factor  less  productive.  The  greatest  productive  need  is 
met  by  adding  to  the  supply  of  the  shortest  factor,  and  he 
who  adds  most  to  the  short  factors  adds  most  to  produc- 
tion. The  high  price  for  scarce  products  reflects  a  high 
price  back  to  the  short  factor;  thus  he  who  produces  most 
gets  most.  If  sulphur  is  the  short  factor  in  the  output  of 
gunpowder,  he  who  adds  most  to  sulphur  adds  most  to 
the  gunpowder,  and  the  high  price  of  gunpowder  will 
reflect  the  highest  reward  back  to  the  producer  of  sulphur. 
And  in  all  cases  where  desirabilities  and  utilities  coincide, 
he  who  gets  most  is  worth  most  to  society. 

If  a  capital  instrument  is  the  short  factor  and  labor  the 
long,  the  capital  instrument  will  secure  more  of  the  product 
as  its  share.  Similarly,  different  grades  of  labor  are  needed 
in  production.  If  skilled  labor  be  the  short  factor  and  un- 
skilled labor  the  long,  then  the  larger  share  will  go  to  the 
skilled  labor.  Or  if  unskilled  labor  were  the  short  factor, 
its  share  would  be  larger  than  that  of  skilled  labor. 

Land  was  the  long  factor,  whereas  labor  was  short  in  this 
country  prior  to  the  Civil  War,  so  the  result  was  a  small 
share  for  landowners  and  high  wages  for  labor.     At  the 


The  Law  of  Proportionality  3(>.5 

same  time  in  England  land  was  the  short  factor  and  the 
labor  supply  was  disproportionately  large.  The  result  was 
the  reverse  of  conditions  in  America — labor  was  cheap  and 
land  rents  dear.  The  same  is  true  throughout  distribu- 
tion— long  factors  and  low  returns,  short  factors  and  high 
returns. 

13.  How  the  Price  of  Agents  Affects  Proportionality. — 
We  have  so  far,  for  the  most  part,  studied  proportionality 
as  a  physical  fact.  It  takes  a  best  quantitative  technical 
combination  to  produce  the  largest  commodity  returns. 
But  nature  has  not  distributed  her  bounties  equally;  some, 
like  air,  she  has  oversupplied,  and  others  she  has  supplied 
sparingly.  We  may  be  very  saving  of  short  factors,  may 
make  every  possible  substitution  for  them,  yet  they  are 
limiting  agents,  and  the  high  price  of  their  products  gives 
them  a  large  share  in  distribution.  The  scarcity  and  cost 
of  these  agents  makes  it  unprofitable  at  times  to  carry  out 
the  best  technical  proportionality  of  factors.  "The  patent- 
office  at  Washington,"  says  Professor  Fetter,  "is  a  veritable 
graveyard  of  ingenious  inventions  that  are  not  commer- 
cially profitable.  The  inventor,  in  order  to  gain  material 
rewards  and  at  the  same  time  to  benefit  mankind,  must 
study  not  only  the  technical  side  of  his  problem,  but  the 
question  of  value  as  well."1 

Mention  was  made  above  that  a  certain  factor  may  hold 
a  monopoly  position  and  others  must  be  adjusted  to  it. 
This  factor  may  be  so  limited  and  high-priced  for  some 
purposes  as  to  defeat  a  best  technical  apportionment  of 
factors  for  other  purposes.  When  there  are  a  number  of 
uses  for  a  limited  agent,  it  will  be  put  to  the  most  remunera- 
tive use,  and  thus  denied  to  the  others.     Hay  is  not  grown 

1  Economic  Principles,  Vol.  I,  p.  109. 


366  Introduction  to  Economics 

on  the  rare  wine-lands  of  France.  In  working  out  an 
apportionment  of  factors,  regard  must  be  paid  to  the  sell- 
ing price  of  the  product  and  the  extent  of  the  market  for 
it,  and  to  the  relative  cost  of  factors  as  well  as  to  the  price 
which  is  offered  for  these  factors  because  of  their  use  in 
other  fields  of  employment. 

Suppose  that  X  is  a  limited  factor  and,  further,  that  the 
production  of  articles  A  and  B  is  conditioned  upon  the  use 
of  X.  If  A  is  very  high-priced,  and  is  in  such  general  de- 
mand that  it  requires  all  of  X  in  its  production,  it  must 
follow  that  if  B  is  a  low-priced  good  it  cannot  be  produced. 
Thus  the  high  price  of  product  A  and  the  physical  limita- 
tion of  productive  factor  X  defeat  the  production  of  B. 
The  large  demand  for  one  commodity  oftentimes  pre- 
cludes the  existence  of  other  commodities,  and  this  is  true 
solely  because  of  the  limitation  and  high  cost  of  certain 
factors  of  production.  Apportionments  will  be  made  that 
will  produce  the  output  which  commands  the  highest 
income. 

Many  writers  say  that  the  price  of  a  product  is  high 
because  the  cost  (money  outlay)  of  the  factors  to  produce 
it  are  high.  This  type  of  shallow  instruction  does  not  get 
below  the  surface.  It  simply  accounts  for  one  price  by 
another  price.  What  we  want  to  know  is  how  to  explain 
the  price  thing.  To  explain  price  two  things  are  to  be 
kept  in  mind:  the  one  is  demand,  and  the  other  is  the 
limitation  of  the  short  factors  of  production  which  makes 
necessary  a  large  cost  outlay  to  secure  the  use  of  them. 

14.  The  Elastic  Limit  of  Factors. — When  we  speak  of 
the  physical  limitation  of  certain  factors,  we  do  not  mean 
that  the  services  which  we  can  get  from  them  exist  in  a 
mathematically  fixed  quantum  under  all  conditions.     A 


The  Law  of  Proportionality  367 

few  words  of  explanation  are  called  for.  The  quantity 
theorists,  for  instance,  tell  us  that  a  dollar  which  turns 
over  ten  times  a  week  does  as  much  money-work,  has  the 
same  effect  on  the  price  level,  and  is  as  large  a  part  of  the 
supply  of  money  as  is  a  ten-dollar  piece  which  turns  over 
once  a  week.  By  like  reasoning,  the  employer  would  as 
willingly  pay  a  skilled  workman  $4  a  day  who  can  turn 
out  four  pieces  a  day  as  to  pay  $4  to  two  inferior  workmen 
who  combined  could  produce  four  pieces  a  day.  The  one 
man  who  turns  out  four  pieces  is  as  large  a  part  of  the 
labor  supply  as  are  two  men  who  combined  could  do  no 
more.  One  will  pay  as  much  rent  for  an  acre  that  pro- 
duces 100  bushels  as  for  two  acres  which  combined  could 
produce  100.  Put  differently,  the  supply  of  productive 
factors  is  not  measured,  in  the  economic  sense,  by  bulk, 
size,  or  area;  it  is  measured  in  terms  of  yield. 

Consider  land  for  the  purpose  of  illustration.  A  group 
of  English  writers,  known  as  the  Maltho-Ricardian  School, 
taught  that  land  is  fixed  in  supply,  while  population  tends 
to  double  every  twenty-five  years.  The  conclusion  from 
these  teachings  was  most  pessimistic;  population  must 
pass  subsistence  and  be  cut  off  by  starvation.  But  the 
lapse  of  a  century  since  this  teaching  began  shows  the 
error  of  this  doctrine.  The  growth  of  population  is  regu- 
lated by  other  causes  than  those  supposed,  and  the  land 
supply  (in  the  economic  sense  of  a  productive  agent)  has 
been  vastly  increased. 

If  a  non-productive  thing  is  made  productive,  the  econ- 
omist calls  it  a  truism  that  the  supply  or  productive  capac- 
ity has  increased.  In  keeping  with  this  truism,  if  swamp 
lands  are  drained  and  set  to  growing  crops,  the  land  sup- 
ply   is   increased.     If   dry   plains   are   made   productive 


368  Introduction  to  Economics 

through  irrigation,  the  land  supply  is  increased.  If  new 
inventions,  discoveries,  or  methods  cause  an  increase  in 
the  yield  of  land,  land  is  more  productive — the  land  sup- 
ply is  increased.  Any  means  of  getting  more  from  land — 
building,  tillage,  and  rotation  of  crops — is  from  the  stand- 
point of  production  and,  therefore,  from  the  economist's 
view,  to  add  to  the  land  supply.  Despite  the  simplicity 
of  this  truism  some  economists  have  joined  company  with 
the  single-taxers  in  denying  it. 

At  a  given  time  or  at  a  given  stage  of  improvements  in 
the  industrial  arts  there  is  more  or  less  fixity  in  the  supply 
of  productive  agents.  The  law  of  substitution  at  any 
given  stage  of  industrial  development  is  operative  to 
secure  the  best  apportionment  of  forces  at  that  time.  The 
better  the  apportionment  the  greater  is  the  supply  of  pro- 
ductive capacity.  The  problem  of  proportionality  has  to 
do  with  variable  factors.  It  would  add  to  simplicity  could 
we  definitely  tie  down  certain  factors  and  regard  them  as 
fixed,  but  such  would  be  an  unreal  simplicity. 

15.  Extent  of  Market. — To  this  point  we  have  considered 
proportionality  with  respect  to  the  proper  adjustment  of 
factors  to  one  another.  The  other  phase  of  the  problem, 
in  its  broader  sense,  is  to  adjust  the  size  of  the  plant  to 
the  extent  of  the  market  for  its  output.  The  best  technical 
adjustment  of  factors  may  leave  the  plant  too  large  or  too 
small  for  the  demand  made  for  its  products. 

In  an  exchange  economy,  such  as  we  know,  where  all 
produce  for  the  market  every  commodity  produced  is  in 
reality  a  demand  for  another  commodity.  If  there  is  too 
large  an  output  of  one  class  of  goods  relative  to  others,  its 
price  will  be  low  in  terms  of  other  goods.  This  is  what  is 
meant  by  overproduction.     There  can  be  no  overproduc- 


The  Law  of  Proportionality  309 

tion  along  all  lines,  for  all  of  our  desires  are  never  fully 
gratified.  There  is  a  tendency  for  man  to  spend  his  means 
so  as  to  keep  his  desires  equally  gratified,  and  if  there  be 
a  disproportionate  supply  of  goods  along  one  line,  it  can 
be  sold  only  at  such  prices  as  shall  tap  a  lower  level  of 
"price-paying  disposition." 

In  a  well-balanced  industrial  community  there  is  a  ten- 
dency for  the  size  of  plants  to  be  apportioned  to  each  other 
as  are  the  productive  factors  in  a  single  plant.  If  one 
line  of  industry  is  relatively  short  its  products  will  sell  at 
a  high  price.  This  will  induce  investments  from  other 
fields  where  the  plants  are  relatively  large.  Thus  there 
is  always  operative  an  automatic  adjustment  of  the  lines 
of  industry  to  one  another.  Then,  proportionality  is  a 
broader  concept  than  the  adjustment  of  parts  to  one 
another  in  a  single  plant;  it  embodies  the  idea  of  the  bal- 
ancing and  adjustment  of  industries  to  one  another  through- 
out industrial  society. 

16.  Quantity  and  Money  Returns. — What  has  been  said 
but  emphasizes  a  point  made  in  an  earlier  chapter,  namely, 
that  there  is  a  limit  to  large-scale  production.  An  entre- 
preneur may  reason  that  by  maintaining  a  good  technical 
apportionment  of  factors  it  will  pay  constantly  to  enlarge 
his  plant.  By  so  doing  he  will  enjoy  decreasing  costs  per 
unit  of  output.  But  such  a  policy  would,  if  continued  too 
far,  bring  him  to  ruin. 

To  the  extent  that  he  buys  up  productive  capacity  in 
the  enlargement  of  his  own  plant,  he  somewhat  reduces  the 
available  productive  capacity  in  other  lines  of  industry. 
Thus,  while  disproportionately  enlarging  his  own  output 
he  causes  a  diminution  in  its  price.  Consequently  his  out- 
put will  bring  a  lower  price  in  terms  of  other  goods,  because 


370  Introduction  to  Economics 

it  will  be  disproportionately  large,  and  others  will  have 
relatively  fewer  goods  to  give  in  exchange  for  his  product. 
So  if  one  directs  a  large  business  or  has  a  monopoly  he 
may  at  the  same  time  enjoy  increasing  returns  with  respect 
to  the  quantity  of  his  output  and  suffer  diminishing  returns 
with  respect  to  the  money  income  from  his  output.  This 
recalls  the  kindred  point,  namely,  that  a  producer's  success 
depends  largely  upon  the  wealth,  prosperity,  and  purchas- 
ing power  of  his  neighbors.  One  never  grows  rich  by  sell- 
ing to  those  who  have  nothing  to  pay. 

But  those  rare  cases,  where  an  increasing  physical  return 
causes  a  decreasing  money  return,  simply  reflect  a  mal- 
adjustment in  industry  as  a  whole.  It  means  merely  that 
some  branches  of  industry  are  proportionately  too  large. 
Should  the  output  from  all  lines  of  industry  increase  uni- 
formly, elasticity  of  market  demand  aside,  the  ratio  of 
exchange  among  products  would  not  change,  therefore  the 
increased  quantity  return  would  mean  also  an  increased 
purchasing  power  or  money  return.  Where  a  right  adjust- 
ment is  kept  a  curve  describing  the  money  incomes  will 
represent  uniform  profits.  We  have  seen  that  in  competi- 
tive industry  there  is  a  tendency  to  uniformity  of  the  ex- 
tensive and  intensive  margins,  and  to  uniformity  in  the  rate 
of  profits.  We  now  see  that  the  whole  tendency  of  com- 
petitive industry  is  to  maintain  automatically  a  uniformity 
of  commodity  and  money  returns  or  exchange  power. 

For  the  average  competitor,  but  not  for  the  monopolist 
or  large  producer,  the  total  money  product  always  varies 
in  proportion  to  the  quantity  of  his  output.  The  amount 
which  he  can  produce  is  too  small  to  affect  perceptibly  the 
general  market  price  of  the  product.  For  him  the  market 
price  is  a  fixed  thing. 


The  Law  of  Proportionality  371 

17.  Summary  Conclusion. — On  the  demand  side:  Man's 
desires  are  numerous;  he  attempts  so  to  expend  his  means 
as  to  gratify  the  most  intense  desire;  as  he  adds  unit  after 
unit  to  the  gratification  of  a  desire  the  desirability  of  the 
added  units  diminishes;  when  the  desirability  of  a  class  of 
goods  diminishes  to  the  point  where  other  classes  of  goods 
hold  for  the  purchaser  higher  desirabilities,  he  will  transfer 
his  expenditures.  The  effect  of  this  order  of  expenditure 
is  the  tendency  (though  far  from  realization  among  the 
poor)  to  maintain  an  equality  of  the  desirabilities  of  differ- 
ent classes  of  goods. 

On  the  supply  side:  Products  come  from  a  combination 
of  complementary  agents,  which  agents  are  limited  in 
amount  and  resist  our  efforts  to  compel  them  to  supply 
our  needs.  Some  of  these  agents  are  scarcer  than  others, 
and  some  show  increasing  resistance  more  readily  than 
others. 

These  facts  call  into  play  the  principle  of  substitution 
which  is  of  first  importance  to  business  managers.  It  is 
based  directly  upon  the  principle  of  resistance,  and  so  it 
has  to  do  with  the  amount  of  agents  that  should  be  com- 
bined with  this  factor  or  that;  it  is  concerned  with  the 
diminution  of  long  factors  and  the  extension  of  short  ones. 
In  brief,  the  substitution  of  factors  is  a  means  to  the  end 
of  the  best  proportionality  of  factors. 

The  proportionality  of  factors  is  their  physical  combina- 
tion and  adjustment  (in  certain  proportions)  which  ren- 
der them  jointly  productive.  Thus  proportionality  is  a 
consequence  of  substitution.  The  law  of  proportionality 
covers  all  productive  factors  in  their  various  combinations; 
it  determines  the  physical  fact  of  productivity.  It  is  the 
organization  of  productive  capacity. 


372  Introduction  to  Economics 

While  proportionality  is  a  physical  fact,  it  is  worked  out 
according  to  the  price  of  products  and  the  cost  of  factors. 
Men  will  form  productive  establishments  only  when  the 
selling  price  of  the  products  is  large  enough  to  leave  a 
reasonable  return  over  all  costs.  The  high  cost  of  certain 
factors  often  makes  impossible  the  best  physical  appor- 
tionment of  them. 

Each  of  the  factors  which  go  to  make  up  a  plant  is  sub- 
ject to  the  principle  of  resistance,  consequently  the  whole 
plant  obeys  the  same  principle.  This  causes  the  product 
to  be  scarce  and  valuable.  The  price  of  the  product  makes 
the  producer  willing  to  pay  a  price  for  the  services  of  the 
productive  agents,  both  severally  and  in  combination. 
But  the  price  paid  for  the  services  of  a  productive  agent 
is  rent,  hence  the  relationship  between  the  principle  of 
resistance  and  rent. 

18.  Exercises. — i.  If  one  man  should  own  New  York  har- 
bor, could  he  obtain  rent  for  it  ?  If  so,  what  now  becomes 
of  the  rent  he  could  get  for  it?  Is  that  harbor  now 
wealth?  Would  it  be  wealth  were  it  owned  by  some 
man? 

2.  If  there  were  no  principle  of  resistance,  would  there 
be  any  difference  in  the  amount  of  land  needed?  In  the 
number  of  laborers  needed?  In  the  number  of  houses 
needed  ? 

What  has  this  principle  to  do  with  the  scarcity  of  grain 
grown  in  a  field?  With  the  size  of  a  load  hauled  on  a 
wagon?     With  the  number  of  chairs  needed  by  a  family? 

3.  Is  there  any  relationship  between  the  facts  noted  in 
Turgot's  statement  (paragraph  4,  this  chapter)  and  the 
price  of  corn? 

4.  What  lands  or  land  uses  are  cultivated?  (Para- 
graph 8.) 

"Under  certain  conditions  it  would  pay  to  carry  on 


The  Law  of  Proportionality  373 

cultivation  beyond  the  intensive  or  the  extensive  margin  of 
utilization."     Why  does  this  statement  contradict  itself? 

5.  "The  law  of  proportionality  is  based  directly  upon 
the  principle  of  resistance  which  causes  an  elastic  limit  to 
the  output  of  each  individual  factor."     Explain  carefully. 

6.  Land  may  be  physically  productive  in  the  sense  that 
it  has  the  physical  properties  for  growing  a  crop,  mean- 
while it  may  be  economically  unproductive.     Explain. 

If  economically  unproductive,  would  any  farmer  work 
land? 

Would  it  add  to  the  wealth  of  society  if  a  crop  should  be 
grown  upon  such  land  ? 

7.  Explain  how  land  economically  unproductive  might  be 
made  economically  productive  by  a  decrease  in  the  wages 
of  labor.  By  superior  management.  By  new  inventions 
or  improvements  in  farm  implements.  By  an  increase  in 
the  price  of  farm  produce. 

8.  The  physical  fact  of  productivity  is  determined  by 
the  great  law  of  proportionality  which  states  a  physical 
relation.  The  physical  apportionment  of  factors  to  one 
another  is  conditioned  upon  the  cost  or  price  of  the  differ- 
ent factors.  Explain  why  the  two  statements  are  con- 
sistent with  each  other. 

9.  An  analysis  of  the  distribution  of  wealth  must  be 
based  directly  upon  the  law  of  proportionality.  (Para- 
graph 12.)     Explain. 

10.  What  economic  principle  explains  why  buildings  are 
so  high  in  Wall  Street?     Why  are  they  not  much  higher? 


CHAPTER   XVII 
THE  RENTING  CONTRACT 

i.  Introduction.  2.  Definition  of  rent.  3.  Durable  goods  rented.  4. 
Buying  or  renting.  5.  Use-value  derivative.  6.  The  renting  contract 
prospective.  7.  The  time  element  in  rent.  8.  Short  factors  and  high  rent. 
9.  What  is  high  rent?  10.  Monopoly  rents,  n.  Product  returns  vs. 
money  returns.  12.  The  tendency  toward  diminishing  money  returns 
universal.  13.  Large  production  and  monopoly.  14.  Conditions  for  study 
of  principle  of  increasing  resistance.  15.  Rent  a  deduction  from  the  prin- 
ciple of  increasing  resistance.  16.  Proportionality  and  rent.  17.  Rent 
limited  by  income.  18.  Rents  limited  by  cost  of  reproduction.  19.  Dif- 
ferential rent.  20.  Differentials  a  measure  rather  than  a  cause  of  rent. 
21.  Difference  in  fertility.  22.  Difference  in  costs.  23.  Differences  in  lo- 
cation.    24.  The  owner's  income.     25.  Exercises. 

I.  Introduction. — Chief  among  the  politico-economic 
problems  of  the  nineteenth  century  were  these:  the  tariff, 
the  pressure  of  population  upon  the  means  of  subsistence, 
the  advantage  of  landowners  in  the  distribution  of  wealth, 
and  the  single  tax.  The  arguments,  pro  and  con,  upon 
these  problems  were  based  directly  upon  the  theory  of 
differential  land  rent.  It  has  been  said  that  a  tariff  would 
force  a  population  to  feed  from  its  own  soil.  This  would 
bring  inferior  lands  under  cultivation  and  increase  rents, 
thereby  enriching  landlords  and  impoverishing  tenants.  It 
has  been  said  that  whereas  the  supply  of  land  is  fixed  by 
nature,  there  is  a  natural  tendency  for  the  population  to 
multiply  rapidly.  Thus  the  increasing  numbers  of  people 
must  cause  pressure  upon  the  earth  for  food,  must  in- 
crease the  landlord's  rent  and  impoverish  the  tenant.  It 
has  been  said  that  the  land  is  the  source  of  all  supplies  and 

374 


The  Renting  Contract  375 

the  field  of  all  labor,  that  the  puniest  infant  who  comes 
wailing  into  the  world  in  the  squalidest  room  of  the  most 
miserable  tenement-house  becomes  at  that  moment  seized 
of  an  equal  right  with  the  millionaires.  And  it  is  robbed 
if  it  is  denied  equal  access  to  the  land.  Place  a  tax,  a  single 
tax,  upon  the  land  so  large  as  to  absorb  all  land  rents. 
This  would  have  the  effect  of  making  public  property  of 
what  is  now  the  private  ownership  of  land. 

Until  recent  years  the  literature  upon  the  subject  taught 
that  rent  forms  no  part  of  the  cost  of  production.  The 
business  man  who  paid  rent  knew  full  well  that  this  was  a 
part  of  his  outgo  or  cost  of  doing  business.  Yet  he  read  in 
the  books  that  rents  were  not  costs.  The  economists  now, 
though  not  without  exceptions,  teach  that  rent  is  a  cost. 

Within  recent  years  another  change  has  been  made  in 
the  thought  on  the  rent  problem.  Rent  was  formerly  de- 
fined as  a  payment  for  the  use  of  land  and  for  the  use  of 
land  only.  To-day  rent  is  defined  as  a  payment  for  the 
temporary  use  of  a  house,  horse,  automobile,  plough,  land, 
or  any  other  durable  productive  agent  other  than  man. 
Rent  is  now  studied  as  one  of  the  primary  shares  in  distri- 
bution, as  a  leading  cost  in  the  production  of  wealth,  as 
the  greatest  obstacle  to  clear  thinking  on  taxation,  and  as 
the  source  of  numerous  social  problems. 

2.  Definition  of  Rent. — If  a  farmer  tills  his  own  soil,  he 
gets  an  income  but  cannot  be  said  to  receive  a  rent.  When 
one  occupies  his  own  dwelling,  or  drives  his  own  team,  or 
uses  his  own  tools,  he  gets  services  (usances),  but  receives 
no  rent.  Rent  is  the  price  paid  by  one  person  to  another 
for  the  temporary  use  of  productive  agents.  Rent  is  but 
a  special  application  of  the  general  problem  of  price — it  is 
the  price  of  the  temporary  services  of  agents. 


376  Introduction  to  Economics 

Rent  implies  private  property.  Where  there  is  no  pri- 
vate property  there  can  be  no  rent.  There  could  be  no 
buying  or  selling,  consequently  no  rent,  apart  from  own- 
ership; the  only  reason  why  you  cannot  rent  or  lease  to 
another  a  public  park  is  because  you  do  not  own  it.  Rent 
also  implies  legal  contracts.  You  cannot  discharge  the 
tenant  at  will,  because  you  are  bound  in  contract  to  fulfil 
your  agreement  with  him  throughout  the  renting  period. 
To  rent  is  to  contract  with  an  owner  for  the  use  of  an 
agent. 

3.  Durable  Goods  Rented. — One  does  not  rent  a  pound 
of  beef,  a  loaf  of  bread,  or  a  ton  of  coal,  because  these  ob- 
jects are  destroyed  by  the  uses  made  of  them.  Rented 
agents  are  returned  intact  to  their  owners  after  the  renting 
period.  If  one  pays  $1,000  a  year  for  the  lease  of  a  house, 
he  is  said,  in  popular  usage,  to  pay  that  sum  as  rent.  But 
in  strict  usage,  the  cost  of  such  repairs  as  will  leave  the 
house  in  as  good  condition  as  when  leased,  must  be  de- 
ducted from  the  $1,000  in  order  to  find  the  net  or  true  rent. 
Rent  is  a  net  sum  over  and  above  all  repairs;  only  those 
things  may  be  rented  which  remain  practically  intact 
through  the  renting  period. 

Goods  which  serve  their  purpose  only  by  entering  into 
permanent  combination  with  other  goods  are  not  rented. 
One  would  not  rent  steel  beams,  or  nails,  or  bricks  to  be 
used  in  the  construction  of  his  house.  One  does  not  rent 
the  thread  with  which  to  sew  a  garment,  because  it  could 
not  be  returned  intact  to  the  owner.  Such  goods  lose  their 
identity  by  becoming  a  part  of  other  goods.  Only  durable 
goods  which  maintain  their  identity  are  well  suited  to  the 
renting  contract. 

The  tenant  who  rents  a  farm  does  not  rent  separately 


The  Renting  Contract  377 

the  land,  hedges,  fences,  ditches,  and  durable  improve- 
ments on  the  land.  These  combined  make  the  farm,  and 
the  farm  thus  composed  of  land  and  durable  improve- 
ments is  well  suited  to  the  renting  contract.  The  different 
factors  cannot  be  separated  for  rent  or  for  purposes  of 
taxation. 

4.  Buying  or  Renting. — It  has  been  pointed  out  that  the 
only  reason  why  one  desires  a  good  or  is  willing  to  pay  a 
price  for  it  is  because  of  the  services  which  it  is  capable 
of  rendering.  You  will  pay  no  price  for  a  house  which 
you  are  forbidden  to  enter,  rent,  sell,  or  otherwise  use. 
The  price  you  will  pay  depends  upon  the  price  of  the  ser- 
vices you  expect  to  get  from  the  house.  You  buy  the 
house  when  you  pay  for  its  services  in  toto;  you  rent  the 
house  when  you  buy  the  services  for  a  limited  period  of 
time. 

It  is  not  always  wise  to  buy  a  dwelling  or  building  for 
one's  business,  even  though  it  is  offered  at  a  reasonable 
figure.  One  may  have  difficulty  in  disposing  of  his  dwelling 
to  advantage  if  he  is  called  elsewhere  to  a  more  remunera- 
tive position;  or  one  may  use  his  capital  funds  to  better 
advantage  by  investing  them  in  something  else.  If  one 
does  not  know  the  neighbors  and  surroundings  in  a  com- 
munity, it  is  better  to  rent  for  a  time  in  order  to  determine 
whether  permanent  residence  is  desirable. 

The  entrepreneur  of  a  new  enterprise  cannot  be  sure  that 
his  business  will  succeed.  The  beginner,  by  renting  for  a 
time,  can  test  his  possibilities  for  success  in  the  building  of 
another,  so  that  in  case  of  failure  his  burden  is  less,  because 
less  fixed  capital  is  involved.  On  the  other  hand,  if  he  is 
successful  his  business  will  grow.  With  the  expansion  of 
business,  larger  quarters  will  be  needed,  and  possibly  a 


378  Introduction  to  Economics 

move  to  a  better  neighborhood  or  trade  centre  would  be 
advisable.  Such  changes  can  be  more  easily  made  by  the 
renter.  When  a  business  has  become  firmly  established, 
especially  if  it  requires  a  large  amount  of  room,  it  may  be 
desirable  to  own  the  building  in  which  it  is  housed. 

If  one's  business  requires  only  an  office,  it  may  not  be 
wise  to  buy  or  build.  It  is  more  economical  to  rent  office 
space  in  a  building  constructed  for  the  purpose.  Such 
buildings  furnish  every  convenience,  are  easily  accessible, 
and  are  well-known.  An  office  in  the  Woolworth  Build- 
ing may  be  had  for  a  reasonable  rent,  but  to  buy  land  in 
an  equally  advantageous  location  and  build  an  office  as 
fully  equipped  would  call  for  a  large  investment. 

One  will  rent  rather  than  buy  in  order  to  gratify  a  tem- 
porary need.  One  will  rent  a  taxicab  rather  than  buy  it, 
to  get  home  on  a  rainy  day.  If  the  farmer's  mowing- 
machine  is  in  the  repair-shop  temporarily,  he  will  prefer 
to  rent  for  the  short  period  of  time. 

5.  Use-Value  Derivative. — There  is  a  difference  between 
the  use  and  the  product  of  an  agent,  a  difference  between 
the  uses  of  a  farm  and  the  corn,  wheat,  or  potatoes  which 
that  farm  produces.  The  use  is  the  origin  of  the  product. 
One  cannot  buy  the  uses  of  potatoes  unless  he  buys  the 
potatoes,  because  the  potatoes  are  destroyed  in  the  proc- 
ess of  rendering  their  uses.  But  one  may  buy  the  uses  of 
the  farm  for  a  given  time  without  buying  the  farm,  because 
the  farm  is  not  destroyed  in  the  process  of  yielding  a  crop. 
The  farm  remains  intact  after  a  period  of  cultivation;  it  is, 
therefore,  as  above  stated,  subject  to  the  renting  contract. 

To  rent  a  farm  is  to  buy  the  uses  of  it  for  a  given  period 
of  time.  The  rent  is  the  price  paid  for  these  uses.  The 
purpose  of  renting  or  of  buying  the  uses  of  the  farm  is  to 


The  Renting  Contract  379 

secure  the  products  or  yield  of  the  farm.  How  much  rent 
will  you  pay  for  the  uses  of  the  farm  ?  As  you  are  willing 
to  pay  the  merchant  a  high  price  for  a  valuable  good,  so 
you  are  willing  to  pay  the  landlord  a  high  price  (rent)  for 
the  opportunity  of  a  valuable  crop.  In  a  sense  the  rent 
is  the  advance  purchase  price  of  the  crop.  The  price  of 
the  farm,  or  of  its  total  uses,  is  derived  from  the  anticipated 
valuation  of  what  it  will  produce  through  time. 

The  products  of  uses  vary  in  nature.  Some  uses  give 
off  a  tangible  return,  e.  g.}  the  corn  from  the  field.  Some 
uses  give  off  intangible  returns,  e.  g.,  the  sound  of  a  musi- 
cal instrument.  The  product  of  a  corner  lot  is  location,  or 
relativity  to  the  market.  The  product  of  an  accountant's 
outfit  is  to  facilitate  the  workings  of  other  agents.  In  the 
rent  problem  the  nature  of  the  product  is  of  no  consequence. 
To  explain  rent  is  to  explain  the  price  of  the  uses  of  rent- 
bearing  agents. 

The  uses  to  which  agents  are  put  determine  the  relative 
supplies  of  goods.  If  the  price  of  corn  increases  while 
that  of  wheat  declines,  more  land  will  be  turned  to  corn 
and  less  to  wheat,  with  the  result — more  corn,  less  wheat. 
But  productive  agents,  all  things  considered,  will  be  turned 
to  their  most  remunerative  employment.  The  rich  to- 
bacco-farm in  Kentucky  will  not  be  used  for  grazing  pur- 
poses any  more  than  would  the  luxurious  mansion  on 
Fifth  Avenue  be  used  for  a  tobacco-barn. 

6.  The  Renting  Contract  Prospective. — The  renting  con- 
tract is  made  before  the  renter  takes  possession.  This  fact 
subjects  the  renter  to  risk.  Smith  leases  a  dwelling,  expect- 
ing to  live  in  it,  and  so  he  must  pay  the  rent,  even  though 
he  cannot  occupy  it  as  when  a  turn  in  business  calls  him 
to  another  town.     Corporations  rent  coal,  oil,  or  timber 


380  Introduction  to  Economics 

lands  at  times,  years  in  advance  of  operations.  The  ten- 
ant contracts  to  pay  a  high  rent  because  he  expects  a 
valuable  crop,  but  pests  or  a  drought  or  a  flood  may  ruin 
his  crop.  He  may  secure  a  large  yield  in  bushels,  but  the 
market  price  may  be  low. 

The  rent  paid  is  fixed  by  contract  at  the  beginning  of 
the  renting  period.     If  the  merchant  agrees  to  pay  $500 


Gain 
, --  st  Earnings  vary. 


•Contract- rent  is  uniformi 


Loss  Loss 


a  month  for  a  building  over  a  period  of  five  years,  his  rent 
outlay  remains  the  same  irrespective  of  his  earnings.  Rent 
depends  not  upon  past  earnings  but  upon  anticipatory 


earnings. 


Because  anticipatory  earnings  are  not  definitely  known, 
the  renter  may  either  suffer  a  loss  or  enjoy  a  net  gain. 
Whereas  rent  is  the  purchase  price  of  the  temporary  uses 
of  an  agent,  the  purchase  price  of  the  agent  is  the  sum 
paid  for  all  the  future  uses  of  the  agent.  Then,  if  risk  is 
involved  in  the  purchase  (rent)  of  the  uses  of  the  agent  for 
the  immediate  future,  certainly  a  greater  risk  is  involved 
in  the  purchase  of  all  the  future  uses. 

We  see  now  that  present  contract  rents  are  based  upon 
the  prospective  or  future  yields  of  agents.  No  one  will 
contract  to  pay  rent  for  an  abandoned  mine  because  of  its 
former  yield.  Rent  emerges  only  in  case  of  a  gain-promis- 
ing opportunity. 

7.  The  Time  Element  in  Rent. — If  one  rents  an  agent 
which  will  yield  an  income  immediately,  he  will  be  willing 
to  pay  a  rental  approximately  equal  to  the  price  of  the 


The  Renting  Contract  381 

yield.  But  if  the  income  will  not  be  secured  before  the 
lapse  of  one,  two,  or  five  years,  the  case  is  different.  Men 
prefer  the  present  over  the  future  possession  of  goods. 
You  would  rather  have  $1,000  to-day,  than  twenty  years 
from  now.  The  average  man  holding  a  note  of  $106  due  a 
year  hence  would  be  willing  to  sell  it  at  the  present  for 
$100.  Assume  that  the  income  from  a  rent-bearer  will 
mature  a  year  hence;  its  present  worth  (future  price  dis- 
counted to  the  present)  will  be  less  than  its  price  at  ma- 
turity. The  further  the  income  is  removed  in  time,  the 
less  is  the  rent  of  the  producing  agent.  Present  rent  is 
derived  from  the  present  worth  of  income. 

8.  Short  Factors  and  High  Rent. — In  working  out  the 
best  proportionality  it  was  found,  in  the  preceding  chap- 
ter, that  certain  factors  may  hold  a  monopoly  position. 
For  instance,  the  available  land  space  may  be  limited.  A 
corner  lot,  a  franchise,  or  natural  conditions  may  fix  the 
area  at  the  disposal  of  the  entrepreneur.  A  monopoly 
right  by  another  may  definitely  limit  the  supply  of  certain 
factors  essential  to  his  business.  Wherever,  for  any  such 
reason,  a  factor  is  limited,  the  entrepreneur  must  work 
out  his  adjustment  of  factors  with  respect  to  this  factor. 
Or  if  the  price  of  one  factor  is  far  in  excess  of  that  of  the 
other  factors,  the  adjustment  will  usually  be  made  with 
respect  to  this  one. 

This  is  but  another  way  of  saying  that  short  factors 
determine  the  capacity  (ability  to  produce  incomes)  of 
productive  establishments.  These  factors  are  high  in 
price  by  virtue  of  the  fact  that  they  are  short  factors. 
As  short  factors  they  limit  the  output  of  goods;  they 
are  most  productive  and,  therefore,  command  the  largest 
rent. 


382  Introduction  to  Economics 

9.  What  Is  High  Rent?— If  a  lot  on  Wall  Street  rents 
for  $50,000  a  year,  while  a  potato-patch  of  the  same  area 
in  Kansas  rents  for  $5,  shall  we  say  that  the  one  rent  is 
high  and  the  other  low  ?  Not  in  strict  accuracy.  One  dol- 
lar for  20  cakes  of  soap  is  no  higher  price  than  5  cents  for 
1  cake.  Likewise  $50,000  for  10,000  units  of  productive 
power  is  no  higher  rent  than  is  $5  for  one  such  unit.  Be- 
fore we  say  a  rent  is  high  we  should  inquire  the  produc- 
tivity of  the  agent  rented.  Where  competition  is  active 
and  free  the  rents  or  prices  of  productive  services  are  re- 
duced to  equality. 

If  one  rents  a  farm  and  pests  or  drought  spoil  the  crop, 
he  has  paid  for  non-remunerative  services — the  rent  is 
high.  If  he  rents  a  business  house  or  a  factory  and  an 
unforeseen  panic  injures  the  business,  he  has  paid  for  non- 
remunerative  services — the  rent  is  high. 

Superior  management  increases  the  productivity  of  land 
as  does  increased  fertilizer.  But  competition  is  such  that 
the  inferior  manager  must  pay  the  same  rent  as  the  most 
skilled  manager.  Under  inferior  direction  the  yield  of  the 
land  may  be  small  as  compared  with  rent,  and  a  high  yield 
relative  to  rent  may  reward  the  efforts  of  the  wise  man- 
ager. For  the  inferior  the  rent  would  be  high  and  for  the 
superior  it  would  be  low.  Rent  is  high  or  low  always  in 
comparison  with  the  price  of  the  yield. 

10.  Monopoly  Rents. — Monopoly  rents  obey  the  same 
principle  as  do  monopoly  prices  which  have  already  found 
discussion.  Monopoly  rents  are  one  kind  of  monopoly 
prices,  for  the  monopolist  will  rent  his  wealth  at  that  figure 
which  will  yield  him  the  largest  net  return.  Monopoly 
rents  are  not  without  limit. 

One  limit  to  monopoly  rent  is  the  selling  price  of  the 


The  Renting  Contract  383 

product;  in  no  case  will  a  tenant  pay  a  rent  that  is  higher 
than  the  anticipated  price  of  his  crop.  Another  limit  to 
the  rent  of  an  agent  is  the  rent  of  other  agents  which  will 
readily  substitute  for  the  monopolized  agent.  Automobile 
trucks  and  draft-horses  may  be  substituted  for  each  other 
in  most  cases.  Should  there  be  a  monopoly  on  draft-horses 
the  rent  could  not  be  made  excessive  because  of  the  avail- 
able substitute  for  them.  Again,  the  monopolist  must 
endeavor  to  preserve  the  renter's  prosperity.  Should  the 
owner  of  a  waterfall  demand  a  ruthlessly  exorbitant  rent, 
he  would  kill  the  business  of  the  renter.  The  renter  can 
go  into  some  other  business  and  would  do  so  if  a  monopo- 
list exact  his  profits  in  the  form  of  rent. 

ii.  Product  Returns  vs.  Money  Returns. — It  is  now 
clear  that  one  rents  wealth  in  order  to  get  returns  from 
that  wealth.  But  of  what  do  returns  consist?  It  is  evi- 
dent that  the  tenant  of  a  farm  may  speak  of  his  return 
as  so  many  bushels  or  as  so  many  dollars'  worth.  For 
some  purposes  it  is  best  to  think  of  returns  in  weight  and 
tale;  for  other  purposes  it  is  best  to  calculate  returns  in 
terms  of  money.  For  purposes  of  trade  and  distribution 
we  are  forced  to  think  of  returns  in  their  price  aspect.  If 
one  is  calculating  his  profits  or  losses  on  the  year's  opera- 
tions, he  can  compare  his  income  and  costs  only  by  reduc- 
ing them  to  their  money  equivalents.  But  if  one  is  reason- 
ing on  the  problem  of  social  well-being,  if  he  is  estimating 
the  current  supplies  to  meet  the  needs  of  the  people,  he 
must  think  in  terms  of  product  rather  than  in  terms  of 
money.  The  supply  of  a  good — as  sugar,  salt,  or  other — 
may  be  least  when  its  price  is  greatest. 

Let  us  consider,  for  example,  all  competitors  who  are 
growing  corn.     As  each  one  endeavors  to  grow  such  an 


384  Introduction  to  Economics 

amount  as  will  render  him  the  greatest  net  gain,  the  total 
number  of  bushels  produced  will  be  greatly  augmented; 
but  the  larger  the  product  return,  the  less  the  price  of  each 
bushel  produced.  After  a  certain  point  is  reached,  the 
total  price  of  the  corn-crop  will  diminish  as  the  number  of 
bushels  increases.  The  producing  competitor  will  suffer 
because  of  the  decline  in  the  price  of  his  corn,  but  the  same 
facts — abundant  corn  at  a  low  price — will  add  to  social 
well-being. 

Assume  now  that  a  monopoly  controls  the  available 
salt  factories.  It  may  well  be  that  by  a  better  physical 
adjustment  of  factors  the  volume  of  output  is  augmented 
at  a  diminishing  cost,  that  is  to  say,  the  cost  per  unit  (per 
bag)  of  output  is  diminished  as  the  volume  of  output  in- 
creases. But  the  demand  for  salt  is  inelastic.  The  price 
must  be  very  low  if  more  than  a  normal  supply  is  sold. 
Then,  despite  the  fact  of  increasing  volume  returns,  there 
will  be  decreasing  money  returns.  It  will  be  to  the  pro- 
ducer's interest  to  curtail  physical  output;  his  interest  will 
conflict  with  the  interest  of  society. 

The  view-point  of  each  competitor  is  now  to  be  consid- 
ered. Any  one  grower  of  corn  will  find  his  crop  so  small 
in  comparison  with  all  the  corn  produced  that  his  output 
will  have  an  insignificant  effect  on  the  market  price.  Con- 
sequently, the  larger  the  amount  of  his  product  the  greater 
will  be  his  money  return.  It  is  then  to  the  interest  of 
each  competitor  to  make  his  commodity  return  large. 
This  being  to  the  interest  of  all  competitors,  causes  the 
maximum  total  output  in  society.  The  competitor's  in- 
terest in  this  case  is  in  keeping  with  the  interest  of 
society. 

From  the  above  reasoning  it  is  clear  that  the  rent  paid 


The  Renting  Contract  385 

for  the  use  of  an  agent  may  be  diminished  in  certain  cases 
by  virtue  of  the  fact  that  improvements  in  the  agent  may 
increase  the  volume  of  its  physical  output. 

12.  The  Tendency  Toward  Diminishing  Money  Returns 
Universal. — When  more  and  more  productive  factors  are 
expended  upon  a  limited  agent  that  agent  will  show  in- 
creasing resistance  to  further  output.  This  was  made  clear 
in  the  preceding  chapter  with  respect  to  a  limited  area  of 
land.  Additional  expenditures  upon  the  limited  agent 
show  a  decline  in  both  the  commodity  return  and  the 
money  return. 

Let  us  now  consider  a  factory  or  a  railroad.  Here  we 
find  a  tendency  for  the  cost,  per  unit  of  output,  to  diminish 
until  a  certain  point  is  reached,  as  the  volume  of  output 
increases.  If  the  railroad  moves  100,000  passengers  a 
month,  its  costs  per  passenger  will  be  less  than  if  it  moved 
only  1,000  passengers.  It  will  cost  the  sugar-refinery  less 
per  hundredweight  of  output  when  it  produces  a  large 
volume,  until  a  certain  point  is  reached,  than  when  it  pro- 
duces a  small  volume  of  sugar.  But  such  institutions 
(sometimes  erroneously  called  institutions  of  increasing 
returns)  will  see  the  total  price  of  their  output  decline 
when  the  volume  of  output  has  grown  beyond  the  normal 
needs  of  the  market.  Ultimately  receipts  will  fall  below 
costs  despite  the  fact  that  the  per-unit  costs  themselves 
are  diminishing. 

Thus  we  find  diminishing  money  returns  generally  appli- 
cable, but  there  are  two  unlike  causes  for  this  general  ten- 
dency, (a)  Money  returns  diminish  in  one  case  because 
of  a  decrease  in  product  returns  relative  to  costs,  (b) 
Money  returns  diminish  in  the  other  case  because  of  an 
increase  in  product  returns. 


38G  Introduction  to  Economics 

13.  Large  Production  and  Monopoly. — Agriculture  fur- 
nishes a  good  example  of  the  tendency  of  money  returns 
to  a  competitive  producer  to  diminish  with  a  decrease  in 
commodity  returns.  There  is  a  definite  paying  limit  to 
the  amount  of  expenditure  justified  upon  a  field.  This 
fact  renders  large-scale  production  upon  a  limited  area  im- 
possible and  maintains  competition  by  keeping  productive 
units  small  and  scattered. 

But,  as  explained  previously,  the  institution  which  dimin- 
ishes the  costs  per  unit  of  output  by  enlarging  its  scale  of 
production  has  a  tendency  to  monopoly.  In  case  of  a 
number  of  competitors  in  the  manufacture  of  sugar,  each 
will  desire  to  reduce  his  productive  costs  below  those  of 
his  competitors.  In  order  to  do  this  he  must  have  the 
largest  output,  and  this  is  made  possible  by  lowering  the 
price  to  drive  competition  from  the  market. 

14.  Conditions  for  Study  of  Principle  of  Increasing  Re- 
sistance.— If  the  student  is  following  this  reasoning  care- 
fully, he  finds  two  unlike  view-points  in  what  has  just  been 
said.  The  one  has  to  do  with  a  given  situation,  with  a 
limited  agent  (in  the  above  case  a  limited  area  of  land). 
One  can  see  the  principle  of  increasing  resistance,  can  iso- 
late it  from  a  heterogeneous  mass  of  details,  only  when  he 
limits  the  study  of  it  to  a  given  agent  at  any  one  time. 
The  words  "at  any  one  time"  are  important.  Should  I 
study  the  comparative  returns  from  a  given  field  in  18 15 
and  191 5, 1  should  observe  a  large  increase  in  returns,  but 
I  should  be  reckoning  with  unlike  situations.  During  the 
century  marked  improvements  have  been  made  in  labor, 
inventions,  and  in  the  arts  of  husbandry  generally.  There 
would  be  a  change  of  situation  which  would  becloud  the 
reasoning  with  respect  to  the  increasing  resistance  of  a  factor. 


The  Renting  Contract  387 

But  if  I  take,  for  the  reckoning  on  returns,  a  given  time 
in  which  no  perceptible  changes  take  place  in  the  arts  of 
husbandry,  if  I  further  confine  my  study  to  a  limited  area, 
I  can  then  and  then  only  observe  the  true  working  and  sig- 
nificance of  the  principle  of  resistance.  The  like  condi- 
tions are  termed  static  conditions.  The  principle  of  resist- 
ance is  always  and  everywhere  operative  in  industry,  but 
the  point  here  made  is  that  under  static  conditions  only 
can  this  principle  be  isolated,  seen,  and  scientifically 
studied. 

In  case  of  growing  large-scale  production,  we  find  that 
there  is  rapid  change  from  old  to  new,  from  small  to  large, 
from  antiquated  methods  and  machinery  to  the  newest 
and  best.  With  these  changes  the  cost  per  unit  of  output 
diminishes.  But  it  is  clear  that  such  changes  are  but 
transitions  from  one  set  of  conditions  to  another.  The 
factors  are  changeable  and  the  mind  cannot  clearly  grasp 
the  true  workings  of  the  resistance  of  any  factor. 

There  can  be  no  compromise;  it  is  absolutely  essential 
for  clear  thinking  on  rent  that  the  student  grasp  this  fact 
— at  any  given  time  the  yield  of  a  productive  agent  cannot 
be  indefinitely  increased  without  increasing  costs.  In  a 
given  time  there  is  an  elastic  limit  to  the  returns  from  any 
productive  agent — be  it  horse,  engine,  house,  field,  or  other. 

15.  Rent  a  Deduction  from  the  Principle  of  Increasing 
Resistance. — All  economy  begins  with  scarcity.  Apart 
from  scarcity,  there  would  be  nothing  to  work  for,  no  in- 
crease of  material  blessings  to  inspire  further  activity;  life 
would  not  be  worth  living.  To  acquire  valuable  things  is 
the  incentive  to  effort  and  the  value  one  attributes  to 
things  (demand  assumed)  is  determined  by  their  scarcity. 
The  resistance  of  agents  to  further  production  causes  the 


388  Introduction  to  Economics 

scarcity  of  goods.  We  are,  therefore,  willing  to  pay  a  price 
or  rent  for  the  services  of  agents  to  produce  these  scarce 
and  desirable  goods.  We  attach  value  to  the  field  because 
of  the  valuable  crops  it  yields,  and  to  the  horse  because 
of  the  valuable  services  it  performs,  and  to  the  boat  be- 
cause of  the  valuable  transporting  it  does.  Products  are 
valuable  because  they  are  scarce,  and  they  are  scarce  be- 
cause of  the  resistance  of  agents  to  the  further  production 
of  them.  Thus  the  scarcity  of  goods  is  traceable  to  this 
basic  economic  thought — the  increasing  resistance  of 
agents.  The  rent  we  are  willing  to  pay  for  the  temporary 
services  of  productive  factors  is  determined  by  the  so-called 
"scarcity  value"  of  these  products. 

1 6.  Proportionality  and  Rent. — Proportionality  or  the 
adjustment  of  productive  factors  to  one  another,  as  we 
have  seen,  is  based  upon  the  law  of  resistance  common  to 
each  and  every  factor  of  production.  It  does  not  pay  to 
apply  too  many  or  too  few  factors  to  any  one  factor — there 
is  a  best  adjustment  or  proportionality.  All  of  the  agents — 
mill,  belts,  fuel,  building,  and  so  on — which  unite  to  con- 
vert a  log  into  lumber  must  be  reckoned  as  one  composite 
productive  unit.  As  you  attribute  value  to  a  horse  as  a 
whole,  so  you  attribute  value  to  a  composite  productive 
unit  as  a  whole.  As  you  would  not  attribute  value  to  the 
legs,  eyes,  and  stomach  of  the  horse  separately,  so  you 
would  not  attribute  value  to  the  engine,  belts,  fuel,  and 
building  of  a  sawmill  separately.  Where  factors  must 
co-operate  to  produce  a  good,  it  is  impossible  to  assign 
to  any  one  agent  a  product  based  upon  the  supposition 
of  separate  productivity.  No  separate  product  can  be 
ascribed  to  any  single  factor. 

Well  does  this  writer  remember  the  first  question  put  to 


The  Renting  Contract  389 

him  on  his  oral  examination  for  the  degree  of  Doctor  of 
Philosophy.  It  was:  "In  a  large  wagon-factory,  what  part 
of  the  value  of  a  spoke  should  be  attributed  to  managerial 
ability?"  His  guess  was  most  fortunate:  "It  can't  be 
done.  All  the  factors  back  of  that  spoke  are  united  into 
one  composite  unit  and  must  be  valued  as  such." 

The  supply  side  of  the  price  of  a  good  is  found  in  the 
comparative  advantage  of  various  combinations  of  factors 
of  production.  If  the  price  of  structural  steel  rises,  the 
entrepreneur  will  undertake  to  increase  the  supply.  His 
problem  is:  "What  changed  proportion  of  the  several  fac- 
tors will  most  easily  turn  out  the  increased  supply?" 
Should  more  labor  be  applied  to  the  same  plant,  or  should 
the  plant  be  enlarged  relatively  to  the  existing  labor  force, 
or  what  should  be  the  conjunction  of  additional  factors? 
The  best  technical  or  physical  adjustment  of  factors  to  one 
another  is  always  conditioned  upon  the  cost  of  the  different 
factors.  If  land  is  cheap  and  abundant,  while  labor  and 
tools  are  scarce  and  high-priced,  farmers  will  not  be  spar- 
ing of  land — it  will  pay  to  "skin"  the  land  in  order  to 
conserve  and  more  intensively  utilize  tools  and  labor. 
Were  land,  tools,  and  labor  of  the  same  degree  of  scarcity 
and  price,  their  intensity  of  utilization  would  tend  to  be 
the  same. 

The  yield  of  any  factor  depends  largely  upon  the  other 
factors  applied  to  it.  Land  can  reach  its  maximum  yield 
only  when  the  agents — tools,  fertilizer,  seed,  labor — are 
most  advantageously  applied  to  it.  Therefore,  the  usance 
of  an  agent  will  be  largest  and  its  rent  highest  when  there 
is  a  best  adjustment  of  other  factors  to  it. 

17.  Rent  Limited  by  Income. — The  rent  which  the 
entrepreneur  does  pay  for  agents  is  vastly  different  from 


390  Introduction  to  Economics 

what  he  would  pay  if  he  had  to.  One  pays  two  cents  for 
the  morning  paper,  but  he  would  pay,  say,  ten  cents  rather 
than  go  without  it;  so  the  owner  of  the  sawmill  may  be 
willing  to  pay  an  annual  rent  of  $5,500  for  an  engine  rather 
than  do  without  it,  but  he  does  pay  for  it  only  the  normal 
competitive  rent.  It  is  a  matter  of  much  concern  to  him 
whether  certain  essential  factors  are  owned  by  a  monop- 
oly. The  limit  to  the  rent  which  he  could  permanently 
pay  for  a  monopolized  factor  would  be  determined  by  all 
of  his  other  costs  and  the  selling  price  of  his  product.  He 
would  lose  if  he  paid  more  rent  for  one  factor  than  the  dif- 
ference between  his  income  and  other  costs. 

Concerns  are  sometimes  forced  to  run  their  business  at 
a  loss  for  short  periods  of  time.  It  is  better  to  get  some- 
thing out  of  the  plant  than  nothing.  Rather  than  disband 
an  organized  laboring  force  during  a  dull  period  in  the 
market  and  pay  interest  and  depreciation  upon  an  idle 
plant  it  may  well  pay  to  rent  an  essential  factor,  although 
such  a  rent  exceed  the  difference  between  income  and 
other  costs.  But  it  is  impossible  for  costs — rent  and  other 
— to  exceed  incomes  over  a  long  period  of  time.  Should 
income  remain  small,  the  plant  would  be  capitalized  at  a 
lower  figure.  Or  if  costs  could  not  be  reduced  the  factory 
would  either  quit  business  or  transfer  to  a  new  line  of 
production.  In  the  long  run,  maximum  rents  cannot  go 
above  income. 

18.  Rents  Limited  by  Cost  of  Reproduction. — Should 
one  control  the  only  thrashing-machine  in  an  agricultural 
community,  he  could  temporarily  command  a  high  rent 
for  the  use  of  it.  But  the  neighbors,  seeing  this  large  rent, 
will  begin  the  purchase  of  thrashers.  This  will  push  down 
the  rents  until  they  pay  only  a  competitive  return  on  the 


The  Renting  Contract  391 

cost  of  a  thrasher.  Where  goods  are  freely  reproducible, 
rents  will  tend  to  a  fair  return  on  cost  of  reproduction. 

19.  Differential  Rent. — One  group  of  thinkers  have 
taught  that  there  would  be  no  rent  were  all  lands  equally 
accessible  and  uniform  in  fertility.  Let  us  examine  this 
idea.  No  one  claims  that  oxen  are  valuable  because  they 
differ  in  weight;  in  the  same  way,  it  would  be  in  the  high- 
est degree  absurd  to  claim  that  houses  are  valuable  because 
some  are  better  than  others.  Is  land  valuable  because 
some  is  better  than  other?  Certainly  not.  The  price  of 
land  is  derived  from  the  price  or  price  equivalent  of  its 
yield.  Whether  land  is  the  same  or  different  in  quality  is 
of  no  consequence  in  explaining  why  land  yields  rent. 
Differences  in  quality  explain  why  some  land  yields  more 
rent  than  other,  just  as  differences  in  diamonds  explain 
why  some  are  worth  more  than  others. 

If  the  net  yield  of  one  field  is  50  bushels,  while  that  of 
another  is  100  bushels,  the  tenant  would  pay  twice  the  rent 
for  the  one  that  he  pays  for  the  other.  Differences  in  land 
may  serve  as  a  measure  of  rent,  may  explain  why  one  field 
rents  higher  than  another.  Differences  in  land  do  not  ex- 
plain the  cause  of  rent.  The  "differential  theory  of  rent" 
is  a  misnomer.  A  theory  is  the  explanation  of  a  fact.  To 
explain  why  some  rents  are  higher  than  others  is  vastly 
different  from  an  explanation  of  the  fact  or  existence  of 
rent.  It  may  well  be  that  inferior  lands  are  unused  and 
valueless,  while  superior  lands  command  a  high  rental; 
but  this  is  nothing  peculiar  to  land.  The  best  apples  may 
command  a  fancy  price,  while  the  knotty  green  ones  are 
left  to  rot  on  the  ground.  But  the  best  apples  are  not 
valuable  because  there  are  inferior  ones,  nor  is  superior 
land  valuable  because  there  are  swamps  and  bleak  sum- 


392  Introduction  to  Economics 

mits  beyond  the  margin  of  cultivation.  Men  rent  land 
and  the  land  is  valuable,  not  because  inferior  land  exists, 
but  because  of  the  scarcity  and  desirability  of  the  services 
it  renders. 

20.  Differentials  which  measure  rent  must  be  distin- 
guished from  the  cause  of  rent.  If  the  net  yield  of  acre 
Number  i  is  ioo  bushels,  while  that  of  Number  2  is  50 
bushels,  the  differential  or  difference  in  yield  between 
these  two  acres  of  land  is  50  bushels.  Acre  Number  1 
will  command  a  rental  larger  by  the  price  equivalent  of 
50  bushels  than  will  Number  2.  This  difference  measures 
the  difference  in  rent.  But  it  is  no  theory  or  explanation 
of  rent,  because  a  theory  of  rent  must  explain  why  rent 
exists.  It  must  answer  the  question  why  a  rent  or  price 
is  paid  for  the  temporary  productive  services  of  a  house, 
horse,  machine,  acre  of  land,  or  other  productive  agent. 
The  differential  idea  is  important,  however,  in  the  expla- 
nation of  why  some  land  or  houses  or  horses  rent  higher 
than  others. 

Business  Sites:  A  corner  lot  usually  holds  a  differential 
advantage  and  commands  a  higher  rent  than  an  inside 
lot.  The  store  on  the  corner  is  more  accessible  to  cus- 
tomers because  twice  as  many  people  pass  by  it.  The 
accommodation  of  customers  is  a  primary  consideration 
in  the  location  of  a  retail  shop.  This  idea  explains  why 
country  stores  are  located  at  the  cross-roads,  and  why 
small  shops  go  to  the  residential  districts  of  cities. 

In  wholesaling  the  differential  advantages  depend  mostly 
upon  nearness  of  shipping  facilities.  Nearness  to  wharfs, 
side-tracks,  and  stations  will  command  a  high  rent  from 
the  wholesaler. 

Residence:  Who  are  the  neighbors?   is  the  primary  ques- 


The  Renting  Contract  393 

tion  in  selecting  a  residence  site.  A  few  years  ago  in  a 
particular  section  of  a  Southern  city  the  houses  were  of 
excellent  construction  and  commanded  a  high  rental. 
Some  undesirable  families  settled  in  that  section,  with 
the  consequence  that  some  of  the  residences  are  vacant, 
while  others  rent  for  a  nominal  sum.  In  another  case  a 
noteworthy  citizen  of  this  country  secured  control  of  the 
real  estate  in  one  section  of  a  small  city,  and  later  on 
moved  there.  This  attracted  men  of  means  to  that  neigh- 
borhood, and  thereby  largely  increased  his  land  rents. 
Other  factors  making  for  differential  rents  on  residences 
are  improvements  such  as  water,  gas,  electricity,  street- 
railway  facilities,  schools,  and  churches. 

21.  Differences  in  Fertility. — A  colony  settling  in  an 
uninhabited  country  finds  more  land  than  is  needed.  Be- 
cause of  its  great  supply  land  is  a  free  good,  no  one  has  to 
pay  a  price  for  the  use  of  it.  The  land  being  of  various 
grades  of  fertility,  the  more  productive  grades  will  be 
occupied  first,  and  with  the  increase  of  population  the 
growing  demand  for  food  will  bring  less  useful  lands  or  less 
useful  qualities  of  land  under  cultivation.  Suppose  that 
there  are  four  grades  of  land.  The  best  quality  (Number  i) 
will  be  first  cultivated,  and  the  second  grade  (Number  2) 
will  be  used  when  the  growing  demand  for  food  can  no 
longer,  except  at  a  high  cost,  be  supplied  from  the  first. 
And  the  further  growth  of  population  will  necessitate  the 
cultivation  of  grades  3  and  4. 

Assume,  now,  that  the  yield  per  acre  of  these  four  grades 
of  land  is  100,  90,  80,  70  bushels  respectively,  and,  further- 
more, that  the  cost  per  acre  of  cultivating  the  different 
grades  of  land  and  of  getting  their  yield  to  the  market  is 
the  same.     With  these  assumptions  in  mind,  the  amount 


394  Introduction  to  Economics 

of  rent  can  be  accurately  indicated.  At  first  no  rent  would 
be  paid  because  land  is  a  free  good.  But  when  grade  2 
comes  under  cultivation,  the  first  grade  will  command  a 
rent  of  the  price  equivalent  of  10  bushels  per  acre.  It  will 
be  immaterial  to  the  farmer  whether  he  cultivates  grade  1 
and  pays  a  rent  equivalent  to  10  bushels  per  acre,  or  culti- 
vates grade  2  free  from  rent.  When  grades  3  and  4  are 
cultivated,  the  rent  per  acre  of  grade  1  will  be  30  bushels, 
of  the  second  grade  20  bushels,  and  of  the  third  grade  10 
bushels. 

22.  Differences  in  Costs. — Let  us  now  assume  that  the 
gross  yield  per  acre  of  these  four  grades  of  land  is  the 
same,  say  100  bushels.  Number  1  may  be  well  kept  and 
ready  for  the  plough;  Number  2  requires  a  considerable 
outlay  for  fertilizer;  Number  3  must  be  fertilized  and 
cleared  of  rocks;  Number  4  must  be  drained,  hedged,  fenced 
as  well  as  fertilized  and  cleared  of  rocks.  The  gross  yield 
is  100  bushels  in  every  case,  but  should  you  be  willing  to 
pay  as  high  a  rent  for  Number  4  as  for  Number  1  ?  Cer- 
tainly not.     Let  us  put  the  case  in  the  form  of  figures. 

Number  1  yields  100  bushels,  less  70  for  costs — rental, 

30  bushels. 
Number  2  yields  100  bushels,  less  80  for  costs — rental, 

20  bushels. 
Number  3  yields  100  bushels,  less  90  for  costs — rental, 

10  bushels. 
Number  4  yields  100  bushels,  less  100  for  costs — rental, 

o  bushels.     (See  figure  2,  page  395.) 

23.  Differences  in  Location. — We  shall  now  assume  that 
the  four  tracts  of  land  each  produces  100  to  the  acre,  and 
that  there  are  uniform  costs  of  50  bushels  an  acre  for  the 
cultivation  of  the  different  tracts.     Let  us  further  assume 


The  Renting  Contract 


395 


No.  1 

No.  2 

No.  3 

No.  4 

Rent 

30 

UK)  ' 

-90 

-80 

-70 

-60 

-50 

•  40 

-30 

-20 

-10 

§ 

V) 

8 

Rent 

20 

MX)  — 
-90 
-80 
-70 
-60 
■50 
■40 
■30 
-20 
-10 

OS 

«o 

S 

Rent 
10 

-90 
-80 
-  70 
-60 
-50 
-40 
-30 

-20 
-10 

s 

60 

a 

p 

00 

fl 

100 
90 
80 
70 
60 
50 
40 
30 
20 
10 


Bent  equals  yield  less  cost 
FlGUEE  No.  2 


that  all  the  products  are  marketed  in  Liverpool,  that  Num- 
ber i  is  in  the  United  States,  Number  2  in  Canada,  Num- 
ber 3  in  Argentine,  and  Number  4  in  Russia. 

The  Russian  tract  could  pay  no  rent,  because  the  cost 
of  cultivation  plus  the  cost  of  transportation  (50  bushels) 
leaves  no  surplus.  The  Argentine  tract  could  pay  a  rent 
of  10,  the  Canada  tract  20,  the  United  States  tract  30. 


u.s 

100  to  acre 
30  rent 


Argentine 

100  to  acre 

10  rent 


Figure  No.  3 


396  Introduction  to  Economics 

As  world  markets  develop,  lands  everywhere  compete. 
Differences  in  location  have  the  same  effect  on  rents  as 
have  differences  in  the  quality  of  land. 

We  may  conclude  from  the  above  illustrations  that  the 
rent  of  a  productive  agent  tends  to  equal  the  present 
worth  of  the  net  yield  for  the  renting  period  of  that  agent 
(the  net  yield  being  the  gross  yield  less  all  costs). 

24.  The  Owner's  Income. — We  have  seen  that  rent  is 
contractual  in  nature,  that  the  rent  problem  is  a  part  of 
the  general  price  problem,  that  rent  is  always  a  price  paid 
by  one  person  to  another  for  the  temporary  uses  of  a  rent- 
bearer.  The  owner  of  a  rent-bearing  agent  has  before 
him  two  alternatives:  he  may  use  the  agent  himself;  he 
may  let  it  to  another  for  a  rent.  In  either  case  he  enjoys 
an  income.  The  prices  or  price  equivalents  of  all  the 
anticipated  incomes — contractual  or  other— discounted  to 
their  present  worth  give  the  present  capital  value  of  the 
agent.  The  term  "  usance- value "  has  been  used  to  sig- 
nify the  return  which  the  owner  gets  from  operating  his 
own  agent.  The  term  "economic  rent"  has  been  used  in 
this  same  sense.  It  is  well  to  have  a  definite  term  for  this 
non-contractual  return  as  well  as  to  have  the  term  rent  for 
the  contractual  return.  I  have  preferred  at  times  to  em- 
ploy the  more  common  terms — yield  and  income — to  sig- 
nify the  non-contractual  return. 

25.  Exercises. — 1.  Jones  lets  his  house  to  Smith  for 
$1,200  a  year.  Jones  pays  for  up-keep  $20,  for  taxes 
$200,  puts  in  a  new  furnace  costing  $500,  makes  a  planta- 
tion of  shrubs  on  the  lot  costing  $100,  bores  a  well  costing 
$300,  grades  the  lawn,  costing  $80. 

Does  Jones  get  any  rent?  If  so,  show  what  outlays 
should  be  deducted  from  the  $1,200  received  in  order  to 
determine  the  rent. 


The  Renting  Contract  397 

2.  Which  of  the  following  are  rent-bearing  agents: 
Loaf  of  bread,  ham,  plough,  farm,  dollar,  lubrica ting-oil, 
house?     Tell  why  in  each  case. 

3.  Generally  speaking,  would  it  be  expedient  to  buy  a 
house  or  to  rent  during  a  period  of  great  building  activity  ? 
Defend  your  answer. 

4.  During  the  World  War  there  was  little  building  in 
New  York,  but  it  was  thought  that  there  would  be  much 
building  immediately  following  the  war.  Would  it,  gen- 
erally speaking,  have  been  better  during  the  war  to  have 
signed  a  long  lease  or  to  have  rented  for  a  year  at  a  time  ? 

What  other  facts  than  those  given  must  you  have  before 
answering  the  question  just  given? 

5.  "When  the  franchise  was  granted  for  a  surface  line 
the  rent  on  dwellings  along  this  street  declined,  but  the 
rent  for  business  houses  increased."  Why  might  this  be 
true? 

6.  "The  big  stores  on  Fifth  Avenue  must  sell  at  a  high 
price  because  of  their  enormous  rents.  We  are  not  so 
conveniently  located,  yet  due  to  low  rents  we  can  sell  at 
much  lower  prices."     Criticise. 

7.  Does  rent  as  a  price  paid  by  one  person  to  another 
add  anything  to  the  wealth  of  society  as  a  whole? 

Does  the  income  (usance  or  economic  rent)  which  one 
gets  from  working  his  own  land  add  anything  to  the  wealth 
of  the  community  ? 

Is  it  the  owner  who  tills  his  own  soil,  or  the  owner  who 
rents  his  soil,  who  suffers  in  case  of  floods,  drought,  pests, 
or  low  prices  for  the  product? 

Why  can  we  not  call  both  the  contractual  and  the  non- 
contractual incomes  rents? 

8.  Short  factors  command  large  rents.     Why? 

9.  What  effect  did  the  opening  up  of  Western  lands  have 
upon  the  land  rents  in  New  England  States?     Why? 

10.  Suppose  a  new  and  inexpensive  chemical  should 
double  the  yield  of  any  land  upon  which  it  might  be  used. 
What  influence  would  this  have  upon  land  rents  in  gen- 
eral?    Would  any  less  land  be  used  than  at  present? 


398  Introduction  to  Economics 

ii.  Should  American  farmers  cultivate  their  soil  as  in- 
tensively as  do  the  Belgian  farmers? 

12.  Why  is  the  tendency  toward  diminishing  money 
returns  universal? 

13.  Rent  is  a  deduction  from  the  principle  of  resistance. 
Explain. 

14.  "Were  a  new  process  discovered  that  would  double 
the  products  of  all  cultivated  lands,  rents  would  double." 
Why  or  why  not? 

15.  Trace  the  sequence  from  rare  land  to  high  land  rent. 

16.  Under  perfect  competition  the  total  costs  to  the 
tenant  of  producing  a  bushel  of  corn  is  exactly  the  same 
whether  he  rents  good  land  or  poor  land.     Why? 

17.  Place  the  following  in  proper  sequential  order:  Lim- 
ited land  area,  increased  demand  for  corn,  larger  produc- 
tion of  corn,  lower  marginal  land,  higher  price  of  corn,  in- 
creased cost  of  production,  increased  land  rent,  increased 
price  of  corn  land. 

18.  Should  the  landlords  forego  all  land  rents  the  price 
of  corn  would  not  be  diminished.     Is  this  true? 

19.  Why  is  the  cost  of  production  the  same  for  any  one 
tenant  at  the  extensive  margin  as  at  the  intensive  margin  ? 

20.  Why  is  the  average  farm  getting  larger  in  the  United 
States  ? 


CHAPTER  XVIII 
POPULATION  AND  THE  SUPPLY  OF  LABOR 

i.  The  supply  of  labor:  Location.  2.  The  supply  of  labor:  Industrial. 
3.  The  supply  of  labor:  Non-competing  groups.  4.  J.  E.  Cairnes.  5.  The 
supply  of  labor,  peculiarities  of.  6.  Alfred  Marshall.  7.  The  order  of 
treatment.  8.  Population — a  world  problem.  9.  Views  of  the  seven- 
teenth and  eighteenth  centuries  favorable  to  the  increase  of  numbers.  10. 
The  attitude  in  new  countries,  n.  The  limit  to  this  progress.  12.  Why 
some  competitors  favor  a  large  population.  13.  The  attitude  in  different 
forms  of  government.  14.  Environment  of  Thomas  Robert  Mai  thus.  15. 
The  Malthusian  theory.  16.  The  persistence  of  the  doctrine.  17.  Rates 
of  birth  and  death.  18.  Malthus's  emphasis  on  the  positive  check.  19. 
Progress  from  pressure.  20.  President  Hadley's  statement.  21.  Doctrines 
logically  following  Malthusianism.  22.  The  simplicity  of  Malthus'  basic 
assumption.  23.  Private  property  and  family  development.  24.  The  in- 
fluence of  freedom  and  public  education.  25.  Conclusion  on  the  limit  of 
numbers.     26.  Exercises. 

i.  The  Supply  of  Labor:  Location. — The  problem  of  the 
supply  of  labor  may  be  local,  or  national,  or  international 
in  scope.  Let  us  consider  the  local  problem.  We  fre- 
quently speak  of  our  cities  as  being  overcrowded  at  the 
very  time  when  crops  in  the  Central  West  are  going  to 
waste  for  want  of  harvest  hands.  If  wages  are  at  a  sub- 
sistence basis  in  New  Orleans  and  at  a  premium  in  St. 
Louis,  we  may  conclude  that  workmen  are  few  in  the  one 
place  and  too  numerous  in  the  other.  Where  jobs  hunt 
labor,  workmen  are  scarce;  where  working  men  hunt  jobs, 
labor  is  in  oversupply.  The  problems  suggested  by  these 
examples  are  local  in  scope. 

National:  For  the  purpose  of  our  present  illustration, 
Canada  and  Australia  are  considered  different  nations;  in 

399 


400  Introduction  to  Economics 

these  nations  and  in  America  high  wages  prevail,  for  the 
population  is  scarce  relative  to  the  abounding  resources. 
Contrast  these  with  Sicily,  where  numbers  are  so  dense 
that  only  a  marvel  of  patient  toil  enables  the  people  to 
live.  In  that  country  there  is  little  machinery,  for  so  low 
are  wages  that  human  toil  is  cheaper. 

Imagine  a  Texas  ranchman  being  compelled,  as  are 
the  Swiss,  to  allow  the  cattle  to  stand  in  a  stable  while  he 
cuts  their  food  and  brings  it  to  them,  lest  they  may  trample 
down  the  precious  grass.  Translate  a  dense  population 
into  terms  of  human  labor  and  again  the  Swiss  are  exem- 
plary. "In  the  haying  season,"  says  Professor  Fetter, 
"the  harvester  clings  with  one  hand  to  the  steep  mountain- 
side, cutting  the  grass  by  the  handful  and  piling  it  in  little 
bunches  loaded  down  with  stones  to  keep  it  from  blowing 
away,  until  it  can  be  carried  down  into  the  valley  on  the 
backs  of  men  and  women." 

Differences  in  the  density  of  populations  in  the  several 
countries  suggest  many  problems,  among  others:  differ- 
ences in  per  capita  wealth  and  wages;  unlike  social  condi- 
tions; migrations  from  overcrowded  to  less  crowded  coun- 
tries.    These  are  studies  in  the  national  supply  of  labor. 

International:  Prior  to  the  occupation  of  the  Americas 
and  Australia  the  growth  of  population  in  England  and 
Europe  had,  considering  the  stage  of  industrial  arts  at  the 
time,  begun  to  press  upon  the  means  of  subsistence.  Many 
observe  the  rapid  multiplication  of  numbers  in  our  time 
and  predict  an  overpopulation  for  the  whole  world.  The 
theory  of  population  is  a  systematic  study  of  the  forces, 
positive  and  negative,  which  account  for  the  number  of 
people.  As  such  it  is  primarily  concerned  with  all  men;  it 
is  international  in  scope. 


Population  and  the  Supply  of  Labor      401 

2.  The  Supply  of  Labor:  Industrial. — The  supply  of 
labor  may  also  be  studied  from  the  standpoint  of  different 
industries.  Because  of  the  division  of  labor  and  specializa- 
tion, the  skilled  artisan  is  limited  to  a  single  line  of  manual 
dexterity.  This  skill  being  the  result  of  many  years  of 
application,  the  artisans  of  to-day  are  those  who  began 
their  preparation  years  back,  and  the  artisans  of  the  not 
distant  future  will  consist  of  those  now  in  training.  At 
any  one  time  the  supply  of  skilled  labor  depends,  not  upon 
the  current  demands,  but  upon  previous  lines  of  training. 

This  makes  the  choosing  of  a  career  a  hazardous  under- 
taking. The  young  man  may  see  that  plumbers  and  fit- 
ters are  scarce  and  highly  paid,  whereas  jewellers  are  plen- 
tiful and  work  for  low  wages.  Influenced  by  this  observa- 
tion, he  becomes  a  plumber  rather  than  a  jeweller;  perhaps 
thousands  of  other  young  men  have  made  the  same  obser- 
vation and  followed  the  same  course.  After  the  lapse  of 
years,  however,  when  these  men  have  attained  proficiency 
in  plumbing,  the  demands  in  these  two  employments  may 
have  changed  about.  There  may  be  a  large  demand  and 
high  reward  for  jewellers,  for  the  reason  that  skilled  men 
are  few  in  the  trade.  The  opposite  of  this  condition  may 
prevail  in  the  plumbing  business.  The  wisdom  of  a  pres- 
ent choice  depends  upon  future  demand  rather  than  upon 
relative  present  incomes. 

The  introduction  of  new  inventions,  the  substitution  of 
one  thing  for  the  use  of  another,  and  changes  in  demand, 
make  it  impossible  to  foresee  the  future  and  adjust  labor. 
Where  supplies  are  slow  to  meet  a  rapidly  changing  de- 
mand, there  is  always  maladjustment.  Labor  is  unlike 
other  goods  in  the  length  of  time  required  to  provide  it, 
consequently  its  adjustment  to  other  things  is  most  imper- 


402  Introduction  to  Economics 

feet.  One  industry  is  blessed  with  an  abundance  of  labor, 
another  has  little  help  and  must  limit  the  output,  still 
another  is  forced  to  substitute  inventions  for  labor  in  order 
to  continue  business,  and  so  on  throughout  the  industrial 
world. 

3.  The  Supply  of  Labor:  Non-competing  Groups. — 
There  is  no  line  sharply  distinguishing  skilled  from  un- 
skilled labor.  But  for  the  most  part  skilled  labor  is  found 
in  the  more  remunerative  positions,  and  these  are  the  posi- 
tions where  ability  and  long  training  count  for  most. 
Many  bricklayers  have  neither  ability  nor  skill  and  some 
hod-carriers  have  both,  but  the  assumption  is  that  men 
are  adjusted  to  tasks  proportionate  to  their  aptitudes,  and 
are  classified  accordingly. 

It  is  well  known  that  the  wages  of  the  skilled  exceed 
those  of  the  unskilled.  But  since  common  labor  for  the 
production  of  our  every-day  supplies  is  indispensable,  why 
this  difference  in  wages?  As  scarcity  makes  diamonds 
more  precious  than  bread,  so  the  relative  shortage  of  sup- 
ply explains  the  higher  wage  for  the  skilled.  Reverse  the 
case,  and  the  higher  reward  would  go  to  the  unskilled. 
Could  labor  move  freely  from  one  grade  to  the  other, 
wages  would  come  to  equality,  as  water,  when  unobstructed, 
attains  a  common  level. 

4.  J.  E.  Cairnes1  further  divides  the  labor  supply:  "What 
we  find,  in  effect,  is  not  a  whole  population  competing  in- 


1  Some  Leading  Principles  of  Political  Economy,  chap.  Ill,  pp.  66-67. 
Although  the  exact  wording  of  Cairnes  is  here  given,  we  use  the  quotation 
to  serve  a  vastly  different  theory  from  the  one  Cairnes  had  in  mind.  He 
regarded  the  idea  of  non-competing  groups  as  a  rare  exception  to  the  "labor- 
theory  of  value";  we  regard  it  as  a  particular  case  of  the  theory  to  be  devel- 
oped shortly,  namely,  the  wages  of  labor  are  determined  by  the  discounted 
marginal  product  of  labor. 


Population  and  the  Supply  of  Labor      403 

discriminately  for  all  occupations,  but  a  series  of  indus- 
trial layers,  superposed  on  one  another,  within  each  of 
which  the  various  candidates  for  employment  possess  a 
real  and  effective  power  of  selection,  while  those  occupy- 
ing the  several  strata  are,  for  all  purposes  of  effective  com- 
petition, practically  isolated  from  each  other.  We  may 
perhaps  venture  to  arrange  them  in  some  such  order  as  this : 

" First,  at  the  bottom  of  the  scale  there  would  be  the 
large  group  of  unskilled  or  nearly  unskilled  laborers,  com- 
prising agricultural  laborers,  laborers  engaged  in  miscel- 
laneous occupations  in  towns,  or  acting  in  attendance  on 
skilled  labor. 

"Secondly,  there  would  be  the  artisan  group,  comprising 
skilled  laborers  of  the  secondary  order — carpenters,  joiners, 
smiths,  masons,  shoemakers,  tailors,  hatters,  etc.,  with 
whom  might  be  included  the  very  large  class  of  small  retail 
dealers,  whose  means  and  position  place  them  within  the 
reach  of  the  same  industrial  opportunities  as  the  class  of 
artisans. 

"The  third  layer  would  contain  producers  and  dealers  of 
a  higher  order,  whose  work  would  demand  qualifications 
only  obtainable  by  persons  of  substantial  means  and  fair 
educational  opportunities — for  example,  civil  and  mechan- 
ical engineers,  chemists,  opticians,  watchmakers,  and 
others  of  the  same  industrial  grade,  in  which  might  also 
find  a  place  the  superior  class  of  retail  tradesmen;  while 
above  these  there  would  be  a  fourth,  comprising  persons 
still  more  favorably  circumstanced,  whose  ampler  means 
would  give  them  a  still  wider  choice.  This  last  group 
would  contain  members  of  the  learned  professions,  as  well 
as  persons  engaged  in  the  various  careers  of  science  and 
art,  and  in  the  higher  branches  of  mercantile  business." 


404  Introduction  to  Economics 

It  goes  without  saying  that  no  hard  and  fast  line  divides 
one  class  from  another,  and  that  there  is  much  seepage 
constantly  going  on  among  them. 

5.  The  Supply  of  Labor,  Peculiarities  of. — Large  families 
are  expensive  rather  than  remunerative  for  parents.  Sal- 
able live-stock  is  bred  for  the  market,  but  there  is  no 
commercial  motive  in  rearing  children.  There  is  some  evi- 
dence of  an  exception  to  this  statement  on  the  early  Ameri- 
can frontier.  There  the  cost  of  rearing  a  family  was  at  a 
minimum;  meanwhile  wages  were  prohibitively  high.  The 
economist,  F.  Bowen,  says  that  a  motive  in  rearing  chil- 
dren was  to  secure  their  labor. 

High  Pay  and  Short  Hours:  The  supply  of  labor  is  not 
wholly  a  question  of  the  number  of  workmen.  The  skill 
and  dexterity  of  labor,  together  with  its  application,  are 
important  in  reckoning  the  labor  supply.  One  man  that 
turns  out  two  units  of  product  a  day  supplies  as  much 
labor  as  do  two  men  who  each  turn  out  one  unit. 

Especially  among  those  whose  standard  of  life  is  low,  a 
higher  wage  causes  less  application.  Irving  Fisher's  exam- 
ple of  the  basket-makers  is  at  point:  "In  South  America, 
for  instance,  traders  from  Europe  were  once  buying  native- 
made  baskets  of  a  peculiar  kind.  In  order  to  increase  the 
supply  of  baskets,  which  was  far  less  than  they  could 
market  in  Europe,  the  traders  decided  to  raise  the  price 
that  they  would  offer  to  the  makers,  thinking  to  stimulate 
the  production  of  baskets  by  inducing  the  men  to  work 
more  hours.  Exactly  the  opposite  result  followed.  As 
soon  as  these  workmen  were  offered  high  prices  for  the 
baskets,  they  worked  fewer  hours  and  made  fewer  baskets 
than  before;  they  could  now  get  more  money  even  for 
doing  less  work,  and  they  did  not  need  or  want  more 


Population  and  the  Supply  of  Labor      40.5 

money.  Their  wants  were  so  few  and  simple  that  the 
marginal  desirability  of  money  to  them  decreased  very 
rapidly  with  an  increased  amount  of  it;  and  their  disin- 
clination to  work  was  so  great  that,  combined  with  the 
feeble  desirability  of  its  rewards  to  them,  they  would 
supply  less  of  it  when  the  rewards  were  great  than  when 
they  were  small.  Similar  instances  have  been  cited  among 
the  Filipinos  and  among  the  negroes  in  the  South.  Recent 
experiments  in  coal-mines  show  that  a  slight  increase  in 
wages  stimulates  the  men  to  work  longer,  but  that  a  large 
increase  (60  per  cent  beyond  the  ordinary  wage)  results  in 
irregularity  of  work  and  the  desire  to  reduce  the  number 
of  hours."1 

It  is  an  accepted  principle  that  a  rise  in  price  stimulates 
production  and  augments  the  supply  of  goods.  If  you 
would  have  an  abundant  crop  of  wheat,  guarantee  the 
owner  a  high  price.  In  peculiar  contrast  to  this  general 
rule  is  the  supply  of  common  labor  which  decreases  for 
the  very  reason  that  other  supplies  increase. 

6.  Alfred  Marshall,  the  distinguished  English  economist, 
points  out  these  peculiarities  of  the  supply  of  labor:  (1) 
The  worker  sells  his  work,  but  retains  property  in.  himself. 
(2)  The  seller  of  labor  must  deliver  it  himself.  (3)  Labor 
is  perishable,  and  often  sold  under  special  disadvantages. 

To  comment  on  the  third  peculiarity  first:  The  work- 
man's labor  is  his  source  of  income,  and  when  he  is  unem- 
ployed the  income  lost  cannot  be  recovered.  Perishable  in 
this  sense  does  not  conform  to  strictly  accurate  usage,  for 
perishable  implies  liability  to  decay;  a  thing  must  have 
existence  before  it  can  decay,  and  labor  does  not  exist 
where  the  worker  is  idle.     If  men  lose  time  when  idle,  so 

1  Elementary  Principles  of  Economics,  chap.  XVII,  pp.  313-314. 


406  Introduction  to  Economics 

does  a  machine,  factory,  or  mine.  Marshall  did  not  do 
well  in  his  choice  of  the  term  perishable.  On  the  whole, 
the  peculiarity  is  this:  the  seller  of  labor  is  commonly 
poor,  cannot  afford  to  dispense  wholly  with  the  wage- 
income,  even  temporarily.  This  puts  him  at  a  disadvan- 
tage in  bargaining  with  his  more  wealthy  employer.  This 
very  peculiarity  has  become  a  primary  cause  for  the  estab- 
lishment of  labor-unions  with  funds  to  support  those  who 
may  be  temporarily  unemployed,  and  to  give  each  member 
the  distinct  advantage  of  collective  bargaining. 

The  second  peculiarity  is  important,  even  though  not 
always  true.  If  you  sell  shoes  your  product  may  go  far 
and  near,  but  you  do  not  present  yourself  where  it  is  de- 
livered. Your  product  may  go  to  decorate  the  tiny  foot 
of  a  winsome  performer  at  the  Winter  Garden,  or  may 
serve  in  the  sewer  to  protect  the  feet  of  the  common  laborer. 

But  the  laborer  must  go  with  his  labor.  Whatever  may 
be  the  temper  of  the  employer  and  the  character  of  the 
associates;  whatever  the  nature  of  the  pursuit,  whether  as 
a  miner  in  the  deepest  shaft  or  as  a  painter  upon  the  top- 
most pinnacle,  whether  as  a  flyer  in  the  air  or  diver  in  the 
sea,  whether  the  work  is  filthy  or  clean,  unhealthful  or 
healthful,  whether  dangerous  as  a  TNT  plant  or  safe  as 
a  pulpit — wheresoever  labor  goes,  the  worker  must  go. 

The  fact  that  the  worker  must  go  with  his  job  is  at  the 
base  of  much  legislation  looking  to  safety  appliances,  sani- 
tation, and  moral  improvement.  The  first  peculiarity  is 
significant,  for  he  who  rears  and  educates  the  laborer  does 
not  receive  the  price  paid  for  his  services.  Producers  of 
material  goods  may  pocket  the  price  paid  for  them.  He 
who  rears  beasts  of  burden  and  builds  factories  or  ma- 
chines reaps  the  reward,  whether    these  are  retained  for 


Population  and  the  Supply  of  Labor     407 

his  own  use  or  sold  to  another.  The  investor  in  private 
property  takes  the  yield;  the  rearing  of  laborers  is  costly, 
but  the  yield  goes  to  the  one  invested  in  rather  than  to 
the  investor. 

Through  differences  in  the  wealth  and  foresight  of 
parents  labor  tends  to  be  divided  into  two  classes — the 
few  who  are  well  trained  and  the  many  who  are  without 
adequate  preparation.  The  evil  of  this  tendency  is  cumu- 
lative. Too  often  the  poor  are  without  vision  for  the  fu- 
ture; their  families  are  large  and  ill  kept.  These  in  turn 
beget  large  families,  thus  continuing  a  process  which  mul- 
tiplies still  further  the  number  who  are  poor  and  inade- 
quately trained.  As  a  rule  wealth  belongs  to  those  who 
appreciate  more  fully  the  importance  of  educating  chil- 
dren. The  few  who  inherit  wealth  and  are  educated  by 
their  parents  in  turn  have  few  children.  In  this  manner 
there  is  a  tendency  to  maintain  a  comparatively  small 
class  of  well-to-do  and  educated  persons. 

7.  The  Order  of  Treatment. — Certain  peculiarities  of 
the  labor  supply,  together  with  its  maldistribution  among 
places  and  industries,  have  been  pointed  out.  Because 
this  subject  matter  sets  forth  in  the  beginning  some  of  the 
more  practical  questions  involved,  it  has  been  considered 
before  the  more  theoretical  aspects.  The  beginner  should 
have  an  idea  of  what  it  is  all  about  in  order  to  appreciate 
the  bearings  of  a  theoretical  discussion. 

The  student  is  well  advanced  toward  a  grasp  of  the  pop- 
ulation problem  when  he  appreciates  that  it  is  a  study  in 
the  proportionality  of  the  number  of  people  to  the  avail- 
able productive  resources.  An  ideal  proportionality  would 
have :  (a)  An  adjustment  of  labor  and  resources  proportion- 
ate to  the  requirements  of  the  several  lines  of  employment; 


408  Introduction  to  Economics 

(b)  a  best  adjustment  of  the  population  as  a  whole  to  the 
total  social  wealth.  Any  discussion  of  the  density  of 
numbers  or  of  the  labor  supply  is  meaningless  unless  the 
number  of  people  is  considered  in  its  relationship  to  the 
resources. 

The  fact  that  there  are  differences  in  the  labor  supply 
relative  to  resources  throws  much  light  upon  the  reason 
why  there  is  such  variance  in  rates  of  wages  in  different 
localities  and  in  different  industries.  It  explains  the  rea- 
son for  intensive  cultivation  in  old  countries  and  extensive 
cultivation  in  the  new.  It  furnishes  the  reason  for  the 
differences  in  per  capita  wealth  in  different  countries.  It 
accounts  for  the  large  tenant  class  in  old  countries  where 
land  is  high.  It  is  the  chief  cause  of  the  migrations  of 
people  from  one  land  to  another.  The  proportionality  of 
population  to  resources  gives  rise  to  many  social  problems. 
Birth-rates  and  death-rates,  wars,  pestilences,  famines, 
etc.,  find  their  chief  explanation  in  the  numbers  of  people 
relative  to  the  available  resources. 

We  shall  now  turn  from  the  distribution  of  numbers 
among  trades  and  territories  to  the  different  views  regard- 
ing the  increase  in  the  numbers  of  mankind. 

8.  Population — a  World  Problem. — When  the  tribes  of 
old  dwelt  in  isolated  places  it  was  possible  for  local  famines 
to  thin  or  destroy  some  tribes,  while  others,  more  fortu- 
nately located,  enjoyed  abundance.  Then  men  were  fed 
from  the  land  upon  which  they  dwelt;  the  want  of  trans- 
portation and  trade  imposed  isolation  and  made  of  each 
community  a  self- sufficing  world. 

Transportation  and  trade,  together  with  the  dissemina- 
tion of  knowledge  put  an  end  to  self-sufficiency.  Want  is 
not  localized  when,  as  Henry  George  would  put  it,  "sheep 


Population  and  the  Supply  of  Labor     409 

killed  in  Australia  are  eaten  fresh  in  England,  and  the 
order  given  by  the  London  banker  in  the  afternoon  is 
executed  in  San  Francisco  in  the  morning  of  the  same  day." 
Were  people  forced  to  feed  from  the  soil  they  occupy,  a 
city,  as  London,  would  forthwith  perish.  But  as  individ- 
uals employed  in  their  several  tasks  provide  each  the  need 
of  others,  so,  through  the  art  of  trade,  localities  and  na- 
tions depend  upon  and  serve  one  another.  With  money 
"I  can  even  lay  the  fertility  of  both  Indies  and  of  the 
farthest  corners  of  the  earth  under  contribution  to  supply 
my  personal  wants."     (F.  Bowen.) 

Transporting  facilities  will  distribute  not  only  products 
but  also  population;  they  carry  people  to  the  food  as  well 
as  carry  food  to  the  people.  If  marked  inequality  arises 
between  places,  the  localities  in  need  will  either  import 
necessities  from  the  lands  having  a  surplus,  or  a  portion  of 
the  people  will  emigrate.  This  tendency  to  equalize  the 
conditions  of  men  is  world-wide,  and  it  makes  the  popula- 
tion problem  a  world  problem. 

9.  Views  of  the  Seventeenth  and  Eighteenth  Centuries 
Favorable  to  the  Increase  of  Numbers. — Prior  to  the 
famous  contribution  of  Malthus  at  the  beginning  of  the 
last  century,  public  opinion  approved  every  increase  of 
population.  The  Englishman,  Joshua  Gee,  writing  in  1729, 
said:  " Numbers  of  people  have  always  been  esteemed  the 
riches  of  a  state."  The  first  sentence  in  Goldsmith's 
Vicar  of  Wakefield  reads:  "I  was  ever  of  opinion  that 
the  honest  man  who  married  and  brought  up  a  large  family 
did  more  service  than  he  who  continued  single  and  only 
talked  of  population."  In  his  justly  famous  essays  of 
1752  David  Hume,  after  discoursing  upon  the  unproduc- 
tiveness of  lawyers  and  physicians,  declared  the  doctrine 


410  Introduction  to  Economics 

that  happiness  and  populousness  are  necessary  attendants. 
William  Pitt's  speech  of  1796  declared  that  those  who 
rear  children  enrich  their  country;  Samuel  Whitebread 
replied  to  Pitt  proposing  a  liberal  premium  for  the  encour- 
agement of  large  families.1 

10.  The  Attitude  in  New  Countries. — In  new  and  par-  -t 
tially  settled  countries  public  opinion  will  give  sanction  to 
a  rapid  multiplication  of  numbers,  for  the  vast  potential 
power  of  idle  resources  only  awaits  the  human  hand.  A 
golden  situation  without  labor  to  exploit  it  makes  a  de- 
mand for  population.  As  between  the  number  of  people 
and  the  supply  of  natural  resources,  maladjustments  take 
two  forms :  in  an  old  and  overpopulated  country,  as  Italy, 
labor  is  the  long  factor,  while  nature's  bounty  is  the  short 
factor;  in  a  new  country,  as  Canada,  labor  is  the  short 
factor  and  resources  the  long. 

The  first  of  these  conditions  gives  rise  to  a  pessimistic 
view  which  regards  additional  numbers  as  a  cause  of  lower 
wages  and  a  multiplication  of  mouths  to  be  fed.  The 
second  type  of  maladjustment  gives  rise  to  an  optimistic 
view  which  sees  in  additional  numbers  a  cause  of  higher 
wages  and  a  multiplication  of  hands  to  do  work. 

11.  The  Limit  to  this  Progress. — A  pioneer  colony  dis- 
embarking in  America  may  be  faced  with  the  alternatives 
of  starving  to  death  or  of  making  their  return  to  the  over-  ■ 
populated  land  from  which  they  came.  Nature  yields  her 
bounties  under  resistance  and  where  the  human  element  is 
too  feeble  few  provisions  may  be  had.  Let  the  numbers 
of  people  multiply  into  the  thousands,  and  labor  will  ac- 
quire sufficient  power  partially  to  overcome  this  resistance. 

1  See  Edwin  Cannan's,  Theories  of  Production  and  Distribution  (second 
edition),  1903,  pp.  124-125. 


Population  and  the  Supply  of  Labor     411 

Let  these  numbers  increase  to  a  hundred  million,  and  na- 
ture's resistance  succumbs  to  the  power  of  man.  The  feat 
of  controlling  the  vast  resources  of  America  by  the  human 
will  has  made  this  the  richest  of  all  nations.  The  march 
of  human  progress  is  from  the  control  of  nature  over  man 
to  the  control  of  man  over  nature. 

But  this  progress  is  not  without  limitation;  its  final  limit 
is  the  point  of  best  adjustment  between  the  numbers  of 
people  and  the  amount  of  resources.  Every  increase  in 
numbers  up  to  this  point  means  an  increase  of  the  average 
per  capita  income,  and  every  increase  of  population  beyond 
this  point  will  decrease  the  average  per  capita  income. 
Up  to  this  point  there  is  a  demand  for  more  people. 

12.  Why  Some  Competitors  Favor  a  Large  Population. 
— Competition  is  based  upon  self-interest,  and  it  is  to  the 
interest  of  our  entrepreneurs  to  produce  goods  at  the  least 
expense.  If  we  would  compete  under  favorable  condi- 
tions with  Europeans  in  the  open  markets  we  must  pro- 
duce equally  as  cheap.  If  the  manufacturers  of  Great 
Britain  produce  cotton  cloth  at  a  lower  cost  than  the 
American  factories,  we  could  not  expect  to  undersell  and 
capture  their  South  American  market  for  this  product. 

A  primary  cost  in  producing  is  the  wages  paid  for  labor, 
and  it  is  to  the  employer's  interest  that  this  cost  be  low- 
ered. Cheap  labor  is  the  entrepreneur's  plea;  his  self- 
interest  adapts  him  to  the  false  view  that  a  mass  of  half- 
paid  workers  would  result  in  industrial  advance  and  in 
national  prosperity. 

As  is  well  known,  this  view  of  the  entrepreneur  has  been 
most  efficacious  in  maintaining  the  open-door  policy  of 
immigration  in  the  United  States.  By  precisely  the  same 
view  they  would  welcome  large  families  to  augment  the 


412  Introduction  to  Economics 

supply  of  cheap  labor.     It  has  been  well  said  that,  "foxes 
approve  large  families  among  rabbits." 

13.  The  Attitude  in  Different  Forms  of  Government. — 
Monarchies  put  first  the  augmentation  of  the  power  of 
rulers.  "It  is  I  who  am  the  state,"  is  the  theory  of  an 
autocrat,  and  in  obedience  to  that  theory  the  land  and  its 
people  are  made  subservient.  In  democracies  the  power 
resides  in  individuals  who  see  to  it  that  the  welfare  of  per- 
sons comes  to  the  fore.  Self-interest  is  at  liberty  to  exert 
itself  in  behalf  of  a  better  distribution  of  wealth.  And  the 
interest  of  first  magnitude  is  per  capita  income  rather  than 
aggregate  national  wealth.  Where  the  welfare  of  individ- 
uals is  of  first  importance,  self-interest  operates  against  the 
pressure  of  over-numbers  long  before  the  senses  revolt  in 
disgust  or  pinch  in  hunger.  In  monarchies  the  self-interest 
of  persons  is  subordinated  to  the  power  of  the  state.  The 
ruling  class  is  content  to  stand  upon  a  substratum  of 
general  poverty  if  only  a  vast  aggregate  wealth  is  at  its 
disposal.  Rulers  seek  aggrandizement  in  the  multiplica- 
tion of  the  people,  for  their  policy  is  imperialistic  and  their 
autocratic  power  seeks  extension  by  the  force  of  arms. 
Whence  large  armies  but  from  the  people  ?  Hence  the  de- 
sire for  a  large  population.  The  aggrandizement  of  a  po- 
tentate is  found  in  the  multitudinous  misery  of  his  subjects, 
but  the  aggrandizement  of  the  people  is  found  in  happy 
fewness  where  prevails  the  highest  average  in  the  ordering 
and  furnishing  of  individual  lives.  The  first  scientific 
study  of  population  was  made  by  Thomas  R.  Malthus. 

14.  Environment  of  Thomas  Robert  Malthus. — Malthus 
was  an  unmarried  English  clergyman  in  a  small  country 
parish  when,  at  the  age  of  thirty-two,  he  published  his  first 
study  (1798)  on  the  population  problem.     At  that  time 


Population  and  the  Supply  of  Labor      413 

the  people  had  begun  to  react  against  the  extravagant 
desire  for  a  large  population.  Reaction  in  France  was  in- 
tensified by  the  cynical  selfishness  with  which  the  court 
and  its  adherents  sacrificed  the  well-being  of  the  people  for 
the  sake  of  their  own  luxury  and  military  glory.  The  feel- 
ing became  general  that,  whether  an  inordinate  increase 
in  numbers  strengthened  the  state  or  not,  it  occasioned 
untold  misery.  It  was  insisted  that  the  rulers  of  the  state 
had  no  right  to  subordinate  individual  happiness  to  the 
aggrandizement  of  the  state. 

While  Malthus  was  furthering  his  studies  the  social  con- 
ditions of  England,  already  gloomy,  were  becoming  more 
unendurable.  At  that  stage  of  industrial  improvement, 
the  population  became  so  large  as  to  strain  seriously  the 
productive  facilities  for  support.  An  astonishing  series  of 
bad  crops  came  at  the  very  time  when  England  was  cut  off 
from  the  markets  of  Europe  from  which  she  was  accus- 
tomed to  import  quantities  of  grain.  Meanwhile  an  ex- 
hausting war,  a  series  of  ruinous  poor  laws,  the  introduc- 
tion of  new  inventions  that  threw  artisans  out  of  employ- 
ment, were  but  aiding  the  evil  forces  of  the  time.  The 
masses  of  England  were  reduced  to  the  greatest  misery 
recorded  in  the  social  history  of  that  country. 

While  the  seasons  were  such  as  to  stunt  the  crops,  the 
principle  of  resistance  was  in  full  force,  still  further  limiting 
the  yield  of  the  intensively  cultivated  land.  As  if  to  add 
to  the  misery,  the  birth-rate  seemed,  without  limit,  to  add 
to  the  overpeopled  land.  The  price  of  wheat  jumped  from 
375.  id.  in  1790  to  83s.  ud.  in  1810. 

These  were  the  conditions  when  Malthus,  by  nature  a 
well-meaning  pessimist,  presented  his  theory  of  popula- 
tion, and  that,  too,  with  a  darkness  of  prospect  ending  in 
evil,  starvation,  and  death. 


414  Introduction  to  Economics 

15.  The  Malthusian  theory  is,  in  brief,  that  population 
has  a  tendency  to  multiply  faster  than  subsistence.  The 
former  perpetually  outstrips  the  latter,  with  the  conse- 
quence that  everywhere  arises  the  disease  of  overpopula- 
tion, with  its  accompaniments — poverty,  starvation,  and 
death.  The  author  mentioned  two  checks  to  this  tendency 
— "the  preventive  and  the  positive."  The  positive  check 
kills  after  birth;  the  preventive  check  prevents  birth. 

Malthus,  wishing  to  put  a  sharp  edge  on  this  argument, 
reduces  it  to  a  mathematical  nicety.  People  understand 
figures  better  than  abstract  statements,  and  the  notion 
that  "figures  won't  lie"  gives  to  the  unreal  an  appearance 
of  truth.  His  memorable  formula  shows  the  frightful 
rapidity  with  which  population  grows  when  allowed  to 
progress  unhindered,  and  the  relative  slowness  in  the 
growth  of  the  means  of  subsistence.  Population  is  shown 
to  follow  a  geometrical  series,  doubling  every  twenty-five 
years,  whereas  the  means  of  subsistence  increase  in  arith- 
metical progression,  each  term  also  corresponding  to  a 
period  of  twenty-five  years.     Thus  the  increase: 

Population 1     2     4     8     16    32     64     128     256     512 

Necessities 1234567        8        9      10 

In  the  table  given  the  lapse  of  only  225  years  is  long 
enough  for  the  population  figure  to  grow  to  over  51  times 
the  means  of  subsistence.  Henry  George  has  been  patient 
enough  to  follow  this  geometrical  series  for  2,150  years. 
He  goes  to  China  for  the  solitary  example  of  a  family  that 
has  survived  a  great  lapse  of  time.  The  descendants  of 
Confucius  still  exist  there,  forming,  in  fact,  the  only 
hereditary  aristocracy.  According  to  the  calculation  the 
members   of   that   family,    2,150   years   after   Confucius, 


Population  and  the  Supply  of  Labor      415 

should  number  859,559,193,106,709,670,198,710,528  souls. 
Though  the  maxims  of  "the  Most  Holy  Ancient  Teacher" 
inculcate  anything  but  the  prudential  check,  yet  there  is 
a  discrepancy  between  a  Malthusian  tendency  and  the 
actual  figures  for  that  family  of  only  22,000. 

16.  The  Persistence  of  the  Doctrine. — How  brief  is  the 
history  of  America  in  point  of  time,  yet  its  population  has 
passed  the  100,000,000  mark.  The  frontier  is  no  more; 
the  occupation  of  land  free  from  charge  has  long  since 
become  history;  already  the  superior  resources  are  har- 
nessed, and  the  ill  effects  of  over-numbers  is  talcing  the 
form  of  diminishing  real  wages.  Note  the  facts:  In  1800 
the  population  of  this  country  was  5,000,000.  Doubling 
four  times  (4  periods  of  25  years  each  =  100)  gives  us 
a  population  of  80,000,000,  which  is  actually  the  figure  for 
1905,  only  five  years  after  the  end  of  the  century.  Go  to 
the  lower  East  Side  of  New  York,  or  to  the  impoverished 
sections  of  the  great  cities,  and  you  see  the  buildings  and 
streets  teeming  with  pallid  children  who  bear  the  marks  of 
poverty.  Contemplate  an  overcrowded  land,  as  is  Sicily, 
where  "For  days  or  months  the  peasants  live  on  almost 
any  sort  of  green  thing  they  find  in  the  fields,  frequently 
eating  it  raw,  just  like  cattle." 

Do  not  these  examples  seem  to  support  the  dismal 
theory,  to  give  some  basis  of  fact  for  the  tendency  of  popu- 
lation to  outstrip  the  means  of  subsistence,  and  to  show 
that  the  equilibrium  of  numbers  with  resources  is  brought 
about  by  misery,  plague,  and  famine,  which  raise  the  death- 
rate  to  equality  with  the  birth-rate?  I  simply  put  the 
question,  deferring  its  answer,  for  the  one  purpose  of  this 
paragraph  is  to  account  for  the  persistency  of  this  much- 
hackneyed  doctrine. 


416  Introduction  to  Economics 

I  venture  the  belief,  furthermore,  that  many  put  faith 
in  Malthusianism  for  no  other  reason  than  the  volume  of 
criticism  hurled  against  it,  now  for  over  a  century.  Is 
not  the  much-continued  smoke  an  evidence  of  fire?  The 
stinging  sarcasm  and  unbridled  abuse  of  half-baked  scholars 
must  disgust  the  thoughtful,  for  what  argument  is  there  in 
abuse  ?  Derision  has  served  to  advertise  the  doctrine,  and 
to  make  it  famous  rather  than  obscure. 

Malthus,  moreover,  made  his  argument  adaptable  to  a 
variety  of  views.  All  know  that  restraint  there  must  be 
in  some  form,  and  if  the  misery- vice-death  type  of  restraint 
is  distasteful,  you  may  be  an  equally  devoted  Malthusian 
by  adhering  to  the  moral  or  preventive  type.  Like  Colonel 
Bryan's  example  of  the  stone  fence  in  Nebraska,  it  is  as 
tall  as  it  is  broad,  and  must  therefore  be  as  high  after  it  is 
overthrown  as  before. 

Many  theories  of  population  have  contested  for  place 
and  attention,  but  these  have  proved  no  more  than  flash- 
lights which  for  a  time  dazzle  and  blind  us  to  the  old  doc- 
trine to  which  sooner  or  later  we  are  forced  to  return. 
But  this  we  must  bear  in  mind,  that  many  modifying  con- 
ditions have  arisen  which  Malthus  could  not  foresee.  No 
one  accepts  the  doctrine  in  unmodified  form.  Thoughtful 
students  now  confine  their  attention  almost  wholly  to  the 
preventive  check  as  among  advanced  societies.  Among 
backward  peoples  the  positive  check  works  in  full  force. 

17.  Rates  of  Birth  and  Death. — By  the  birth-rate  we 
mean  the  number  of  births  per  1,000  inhabitants  per  year. 
If  the  population  of  Blank  City  is  100,000  and  the  number 
of  births  there  is  3,600  a  year,  the  birth  rate  is  36  per  1,000. 
Statisticians  sometimes  speak  of  the  refined  birth-rate, 
meaning  thereby  the  number  of  births  a  year  per  1,000 


Population  and  the  Supply  of  Labor      417 

women  of  child-bearing  age,  from  fifteen  to  fifty.  The 
greater  the  per  cent  of  the  population  which  are  of  child- 
bearing  age,  the  greater,  other  things  the  same,  will  be 
the  birth-rate.  This  explains  why  in  some  communities 
the  birth-rate  is  so  large  among  immigrants  as  compared 
with  the  native  population.  A  large  portion  of  the  natives 
are  either  children  or  elderly  persons,  while  the  immigrants, 
especially  the  newly  arrived,  are  wage-earners  at  a  pro- 
creative  period  of  life. 

By  the  death-rate  we  mean  the  number  of  deaths  per 
one  thousand  inhabitants  per  year.  It  is  computed  and 
expressed  in  the  same  manner  as  the  birth-rate. 

The  difference  between  the  birth-rate  and  the  death-rate 
for  any  one  year  represents  the  rate  of  increase,  or  of  de- 
crease, of  population  for  that  year.  If  the  birth-rate  is 
36  per  thousand,  and  the  death-rate  16  per  thousand,  the 
increase  of  population  is  20  per  thousand,  or  2  per  cent. 

The  tendency  of  numbers  to  increase  depends  upon  two 
things — propagation,  preservation.  Where  the  tendency  to 
propagate  is  greatest,  there  may  be,  however,  no  increase 
in  numbers.  In  backward  societies  record  has  been  made 
of  tribes  in  which  it  is  normal  that  women  forty  years  of 
age  have  given  birth  to  twenty  children.  So  low  is  the 
preservation  of  numbers,  however,  that  the  population  is 
stationary  in  these  tribes. 

To  preserve  a  child  to  manhood  the  parent  must  feel 
sufficient  love  for  it  to  provide  care  and  the  necessities  of 
life.  Races  have  different  tendencies  to  cherish  and  pro- 
vide for  their  offspring.  Premature  death  from  disease, 
or  want  of  parental  care,  or  the  niggardliness  of  nature  to 
provide  sufficient  means,  may  tend  as  strongly  to  diminish 
population  as  does  procreation  to  increase  it.     Inquiry  into 


418  Introduction  to  Economics 

the  nature  and  causes  of  increase  must  give  equal  regard 
to  the  forces  preservative  of  population  as  to  propagation. 

18.  Malthus's  Emphasis  on  the  Positive  Check. — Since 
the  writings  of  Darwin,  who  was  influenced  somewhat  by 
Malthus,  the  thought  of  scholars  has  turned  to  the  theory 
of  development  by  natural  selection  or  survival  of  the  fit- 
test. In  consequence  much  has  been  read  into  Malthus 
that  was  not  a  part  of  his  own  thought. 

At  the  time  he  received  his  education  the  laws  of  physi- 
cal science  and  the  methods  of  thought  common  to  the 
exact  sciences  dominated  thought  and  set  the  way  of 
thinking  for  the  social  sciences. 

His  thought  was  on  a  material  basis;  the  earth  is  limited 
in  its  power  to  supply  physical  means  of  subsistence,  popu- 
lation can  progress  to  the  extent  of  this  limit  and  there  it 
must  stop.  By  nature  man's  procreation  is  controlled,  by 
nature  the  food  supply  is  controlled,  nature's  consequence 
is  through  misery  and  vice  to  place  a  definite  physical 
limitation  which  man  cannot  control  and  beyond  which 
he  cannot  go.  Consider  Malthus's  later  work  on  political 
economy  and  this  leaves  no  room  for  doubt;  it  shows  be- 
yond question  that  his  thought  was  tuned  to  and  ruled 
by  the  laws  of  exact  science  dealing  with  material  things. 
Rent  due  to  physical  differences  in  soil  and  the  natural 
law  of  diminishing  returns;  wages  due  to  the  procreative 
instincts  and  to  the  niggardliness  of  nature;  interest  fixed 
by  the  natural  workings  of  self-interest — these  were  chief 
tenets  of  his.  Malthus  brought  in  enough  of  volitional 
control  to  save  his  doctrine  from  being  characterized  as 
predestination  in  its  boldest  form.  The  positive  check  was 
his  main  interest  and  the  theory  of  his  treatise  was  built 
around  it. 


Population  and  the  Supply  of  Labor      419 

19.  Progress  from  Pressure. — Closely  related  to  these 
checks  is  the  dynamic  influence  which  pressure  seems  to 
bring  about.  The  poverty  engendered  by  pressure  acts 
as  a  powerful  stimulus  in  the  development  of  industry, 
science,  and  invention.  It  took  the  pressure  of  war  to 
bring  out  numerous  devices  previously  unknown,  to  per- 
fect forms  of  organization  and  strategic  moves  with  power 
to  overcome  the  force  of  the  enemy.  Man  must  also  in- 
vent, reorganize,  and  marshal  anew  his  forces  in  his  time- 
enduring  contest  with  the  niggardliness  of  nature. 

Malthus,  unwilling  to  give  more  credit  than  that  of  an 
arithmetical  progression  to  human  ingenuity,  looked  upon 
increasing  numbers  as  deadening  to  progress.  Were  Mal- 
thus now  alive  he  would  doubtless  admit  that  the  experi- 
ence of  a  century  shows  supplies  to  have  outgrown  the 
number  of  people.  But,  he  would  admonish  us,  experience 
is  often  a  deceptive  teacher;  the  past  century  must  be 
regarded  as  a  period  of  readjustment  and  of  the  occupa- 
tion of  new  lands.  The  end  of  this  period  of  prosperity 
is  rapidly  approaching. 

20.  President  Hadley's  Statement.1 — "This  pressure  of 
population  upon  subsistence  serves  in  no  slight  degree  as  a 
stimulus  to  improvement  in  the  arts.  It  was  this  which 
forced  hunting  tribes  to  practise  the  domestication  of  ani- 
mals. It  was  this  which  forced  wandering  pastoral  tribes 
to  settle  down  and  apply  themselves  to  the  less  exciting 
and  agreeable  arts  of  agriculture.  It  is  this  which  has 
done  much  to  accelerate  the  change  from  the  military 
organization  of  society  to  the  modern  system  of  free  labor. 
The  attempt  to  provide  for  all  children  that  might  be  born 
would,  in  the  opinion  of  the  Malthusian,  not  only  prove 

1  Economics,  pp.  45-46. 


420  Introduction  to  Economics 

futile  from  the  difficulty  of  finding  food  enough  to  go 
around,  but  it  would  also,  first,  take  away  the  stimulus 
under  which  progress  had  been  made;  second,  put  a  stop 
to  the  natural  selection  of  the  stronger  individuals  and 
families  and  reduce  the  race  to  a  dead  level;  third,  impair 
the  capital  of  the  community  through  increased  consump- 
tion and  diminished  production  so  much  that  it  could  not 
maintain  the  stage  of  civilization  which  it  had  reached, 
and  that  its  progress  must  give  place  to  retrogression. 
The  Malthusian  therefore  argues  that  society  cannot  un- 
dertake to  relieve  its  members  from  the  pressure  and  from 
the  evils  of  poverty  unless  they  will  consent  to  adopt  pre- 
ventive checks  to  population." 

21.  Doctrines  Logically  Following  Malthusianism. — To- 
day there  is  no  fear  of  universal  misery,  although  our  sys- 
tem of  property  may  threaten  the  very  existence  of  numer- 
ous families.  But  is  it  not  the  business  of  society  to  pro- 
vide for  its  members?  On  the  whole  poverty  is  decreas- 
ing, and  many  who  suffer  want  have  but  themselves  to 
blame.  None  the  less,  the  present  system  is  criticised  for 
falling  short  of  its  duty;  when  any  man  is  willing  to  work, 
it  is  said,  he  should  not  be  denied  the  privilege.  Malthus 
made  sharp  criticism  of  this  idea  on  the  ground  that  society 
could  not  undertake  to  furnish  employment,  and  that 
poverty  grew  out  of  the  pressure  of  population  upon  the 
means  of  subsistence.  He  thought  it  no  indictment  against 
society  that  the  struggle  for  existence  should  reduce  some 
to  poverty. 

Would  Malthus  sanction  the  distribution  of  alms  among 
the  poor  ?  The  question  of  charity  has  always  been  a  per- 
plexing one;  there  are  many  who  can  produce  large  for- 
tunes, but  surprisingly  few  who  can  give  wisely  to  charity. 


Population  and  the  Supply  of  Labor      421 

Right  or  wrong,  Malthus  could  have  but  one  conclusion — 
to  give  charity  adds  to  the  evil  of  overpopulation.  In 
criticism  of  an  English  poor  law,  he  said:  "Canute,  when 
he  commanded  the  waves  not  to  wet  his  princely  foot,  did 
not  in  reality  assume  a  greater  power  over  the  laws  of 
nature."  He  thought  that  public  charity,  with  particular 
reference  to  England's  system  of  poorhouses,  would  en- 
courage child-bearing.  "The  poor  are  themselves  the 
cause  of  their  own  poverty,"  but  if  the  state  assumes  the 
burden  of  this  poverty  there  can  be  no  limit  to  overpopu- 
lation short  of  reducing  the  whole  people  to  the  minimum 
of  subsistence. 

The  population  theory  made  a  protectionist  of  Malthus. 
A  system  of  international  trade  bringing  into  England  an 
abundance  of  necessities  only  augments  the  ill  effects  of 
overnumbers.  Let  England  limit  her  population  in  ac- 
cordance with  the  provisioning  of  her  own  soil,  he  argues, 
and  her  difficulties  will  be  less  when  international  wars 
cut  her  off  from  the  markets  of  the  world. 

This  theory  has  stood  in  the  way  of  social  relief,  has 
defended  the  capitalist,  and  shifted  the  responsibility  for 
the  maldistribution  of  wealth  from  human  institutions  to 
natural  laws.  To  feed  the  hungry  and  clothe  the  naked 
is  to  run  counter  to  the  decree  of  Providence,  for  let  the 
capitalist  divide  profits  with  the  poor  and  no  relief  is  given. 
Numbers  multiply  in  proportion  to  charity  given,  only  to 
press  again  upon  the  means  of  subsistence.  Charity  can 
only  impoverish  the  giver,  and  it  cannot  aid  the  pauper; 
if  it  tends  to  equality,  it  is  an  equality  of  common  mis- 
ery. 

22.  The  Simplicity  of  Malthus's  Basic  Assumption. — In 
many  respects  there  is  close  similarity  between  the  writings 


422  Introduction  to  Economics 

of  Malthus  and  Darwin.  The  struggle  for  existence  is, 
said  Darwin  himself,  Malthusianism  applied  to  the  whole 
animal  and  vegetable  world.  Despite  the  similarity  of  sub- 
ject matter  and  lines  of  treatment,  there  was  a  vast  differ- 
ence in  method  between  these  famous  scholars.  Malthus 
reduced  his  problem  to  an  unreal  simplicity;  he  reasoned 
concerning  man  as  he  would  concerning  an  Australian 
rabbit.  He  thought  of  either  as  having  a  few  defi- 
nitely fixed  attributes  unalterable  by  circumstances. 
Darwin's  was  a  doctrine  of  adaptability.  It  was  his 
thought  that  animals  change  characteristics  in  conformity 
with  their  environment,  and  that  "reasoning  man  excels 
in  adaptability."  Briefly  put,  the  view  of  Malthus  was 
static,  that  of  Darwin  dynamic. 

How  did  Malthus  apply  his  simple  notion  of  human 
nature  to  the  question  of  marriage?  He  was  willing  for 
the  rich  to  marry  young,  for  in  all  respects  his  was  a  rich 
man's  doctrine  that  made  a  public  benefaction  of  the  greed 
and  self-interest  of  the  upper  class.  But  he  admonished 
the  poor  to  delay  marriage,  for  he  regarded  early  marriage 
and  large  families  as  convertible  terms.  His  purpose  was 
to  shorten  the  procreative  period  of  married  life. 

His  characteristic  error  lay  in  the  assumption  that  the 
procreative  instincts  of  animals  and  men  are  essentially 
the  same.  He  treated  too  lightly  the  moral  and  intellec- 
tual differences,  but,  most  important,  he  virtually  ignored 
the  distinction  between  sexual  and  reproductive  instincts. 
The  two  are  in  no  wise  similar  and  are  governed  by  dif- 
ferent motives.  Gide  well  says:  "Only  to  the  first  can 
be  attributed  that  character  of  irresponsibility  which  he 
wrongly  attributes  to  the  second."  They  differ,  indeed, 
as  animal  instincts  differ  from  the  social  and  religious. 


Population  and  the  Supply  of  Labor      423 

23.  Private  Property  and  Family  Development. — Private 
ownership  tends  to  divide  society  into  classes.  This  ten- 
dency calls  for  a  restatement  of  certain  outgrowths  from 
private  property.  When  a  system  of  property  arose  to 
make  men  secure  in  their  possession,  the  result  was  most 
beneficial  yet  an  apparent  violation  of  justice.  It  led  to 
domination  rather  than  extinction  among  successful  fight- 
ers in  an  early  age.  If  there  were  no  right  to  hold  in  pos- 
session, conquerors  would  kill  the  conquered,  whereas  pri- 
vate property  would  preserve  them  as  slaves.  Security  of 
tenure  also  stimulates  the  saving  as  well  as  the  creation  of 
wealth. 

Private  property  divides  families  from  one  another  as  if 
they  were  in  separate  compartments.  It  places  the  house 
of  have  beside  that  of  want,  and  enables  Jones  to  rear  his 
family  in  luxury  while  Smith,  who  lives  within  a  stone's 
throw,  must  for  want  of  means  rear  his  family  in  indigence. 
There  is  no  "keeping  up  with  the  Joneses"  on  the  part  of 
Smith,  for  the  former  has  been  more  prudent  than  the  lat- 
ter. This  individualizes  the  problem  of  overpopulation 
by  bringing  it  within  the  discretion  of  each  householder. 
It  enables  a  progressive  advance  of  the  members  of  a 
family  from  generation  to  generation,  and  again  it  permits 
the  poverty  of  a  family  to  deepen  from  generation  to  gen- 
eration. 

But  what  of  family  progress  were  the  burdens  of  poverty 
equally  shared?  In  a  social  state  the  burdens  of  the  im- 
provident would  drag  all  down  to  a  common  state  of  pov- 
erty. Private  property  then  gives  free  play  to  the  process 
of  natural  selection  of  the  types  most  fit  to  survive. 

"At  this  point,  it  is  interesting  to  note  one  of  the  great 
economic  paradoxes.     They  who  call  themselves  socialists, 


424  Introduction  to  Economics 

and  who  might  therefore  be  supposed  to  look  at  things 
from  the  standpoint  of  the  group  or  the  state,  are  the  very 
people  who  are  least  inclined  to  do  anything  of  the  kind. 
To  them  the  group  or  the  state  is  only  an  agency  through 
which  individual  rights  and  advantages  are  to  be  obtained. 
The  kind  of  reasoning  which  necessarily  follows  from  the 
conception  of  the  group  as  an  entity  having  interests  more 
permanent  and  greater  than  those  of  individuals  is  pecu- 
liarly abhorrent  to  them.  Such  an  idea  as  that  the  ad- 
vantage should  be  given  to  the  strong  rather  than  the 
weak,  in  order  that  the  herd,  group,  or  state  may  become 
eventually  a  herd,  group,  or  state  of  strong  members,  is 
diametrically  opposed  to  all  their  ideals  and  ways  of 
thinking."1 

24.  The  Influence  of  Freedom  and  Public  Education. — 
Common  property  implies  a  common  burden,  and  what- 
ever may  be  one's  endeavor  to  act  with  prudence,  he  can- 
not emancipate  himself  from  the  burden  of  poverty  caused 
by  the  imprudence  of  others.  Private  property  tends 
rather  to  happy  fewness;  Jones  is  responsible  both  for  the 
size  of  his  family  and  for  its  provisioning.  This  gives  mo- 
tives, on  the  one  hand,  to  have  the  family  smaller,  and, 
on  the  other,  to  produce  wealth  for  its  subsistence  and  to 
save  wealth  for  its  maintenance. 

But  men  are  imitative,  and  the  craving  to  enjoy  the 
status  of  the  well-to-do  affects  the  masses.  In  a  state  of 
private  property  and  freedom,  such  as  ours,  this  craving 
for  the  luxuries  of  the  rich  shows  itself  in  an  economy  of  off- 
spring.   As  Professor  E.  A.  Ross  says:2  "The  little  stranger 

1  Thomas  N.  Carver,  Essays  in  Social  Justice,  p.  321. 

2  Western  Civilization  and  the  Birth-Rate.  Publications  of  the  Ameri- 
can Economic  Association  (3d  series,  vol.  VIII,  No.  1)  Feb,  1907,  pp.  80-81. 


Population  and  the  Supply  of  Labor      425 

trenches  on  raiment,  bric-a-brac,  upholstery,  travel,  enter- 
tainment. Here  the  decencies,  there  the  comforts,  yonder 
the  refinements  and  vanities  of  life  compete  with  the  pos- 
sible child  and  bar  it  from  existence."  Our  state  knows 
no  durable  system  of  caste;  "wide  stairways  are  opened 
between  the  social  levels,  and  men  are  exhorted  to  climb 
if  they  can."  If  children  impede  the  climbers,  prudence 
will  take  care  that  children  are  not  born.  From  this  I 
conclude  that  our  free  educational  system  is  now  a  factor, 
and  is  destined  to  become  a  most  powerful  factor,  in  the 
prevention  of  families  burdensomely  large  among  the  poor. 

25.  Conclusion  on  the  Limit  of  Numbers. — The  preven- 
tive and  positive  checks  both  operate,  the  latter  among 
backward  people  and  the  former  among  the  more  cultured. 
In  an  advanced  country,  as  France,  where  the  population 
has  been  almost  stationary  for  years,  volitional  control 
regulates  numbers,  whereas  among  the  Eskimos,  where 
"the  girl  is  married  in  her  teens  and  carries  a  baby  on  her 
back  each  summer,"  the  population  is  stationary  wholly 
because  of  the  positive  check. 

We  have  found  that  in  a  state  of  free  labor  and  private 
property  the  responsibilities  of  rearing  children  are  indi- 
vidualized; they  fall  directly  upon  the  parent  and  only 
indirectly  upon  society.  We  have  found  that  with  the 
spread  of  knowledge  the  reproductive  instinct  tends  to 
divorce  itself  from  the  sexual  instinct.  These  facts  reduce 
the  problem  to  its  simplest  form.  Each  parent,  realizing 
the  personal  responsibility  involved,  and  apart  from  sexual 
instinct,  answers  this  question — how  many  children  do  I 
want  ? 

Three  considerations  enter  into  his  answer — his  plane  of 
living,  his  standard  of  living,  and  the  devotion  he  would 


426  Introduction  to  Economics 

feel  for  the  offspring.  These  influences  vary  from  person 
to  person. 

The  plane  of  living  is  his  actual  possession  and  enjoy- 
ment of  goods — his  actual  level  of  subsistence  and  comfort. 
It  is  an  objective  fact.  The  standard  of  living  is  a  subjec- 
tive fact — a  fact  of  thought,  desire,  and  purpose. 

If  one's  plane  of  living  is  above  his  standard  of  living, 
children  are  more  likely  to  be  welcomed.  Children,  too, 
are  welcome  if  one  is  optimistic  regarding  the  future  of  his 
plane  of  living.  An  intense  love  for  children  serves  to 
cause  a  willingness  to  lower  the  plane  below  the  standard 
of  living. 

In  a  larger  sense  the  apportionment  between  the  num- 
bers of  people  and  the  productive  resources  must  affect 
the  individual  planes  and  standards  of  living.  If  the 
average  standard  of  living  is  low,  the  adjustment  of  num- 
bers to  resources  will  be  fixed  at  a  point  where  the  plane  of 
living  will  be  low.  The  growth  of  numbers  will  be  arrested 
where  the  proportionality  between  the  numbers  of  people 
and  the  resources  come  into  conformity  with  the  standard 
of  living.  Numbers  will  increase  as  the  standard  of  living 
is  lowered,  and  vice  versa. 

I  am  aware  that  a  full  discussion  of  the  supply  of 
labor  would  carry  us  beyond  a  mere  study  of  the  increase 
of  numbers;  the  strength,  knowledge,  inventiveness,  and 
character  of  people  bear  upon  the  productive  capacity  of 
labor.  Further  than  the  slight  consideration  already  given 
these  important  matters,  however,  the  scope  of  this  book 
will  not  permit  us  to  go. 

26.  Exercises. — 1.  Real  wages  are  higher  in  Europe  than 
in  China,  and  higher  in  the  United  States  than  in  Europe. 


Population  and  the  Supply  of  Labor      427 

Assume  that  you  were  asked  to  make  an  investigation  to 
explain  the  differences  between  the  real  wages  in  these 
countries.  What  questions  would  you  ask  relative  to  the 
environment  of  labor  in  the  different  countries?  What 
questions  would  you  ask  relative  to  the  laborers  themselves 
in  the  different  countries  ?  What  questions  would  you  ask 
relative  to  the  political  and  economic  institutions  in  the 
different  countries? 

2.  During  the  World  War  doctors  of  medicine  were  so 
scarce  that  their  services  commanded  a  very  high  price, 
yet  the  supply  of  doctors  could  not  be  readily  increased. 
Might  there  have  been  a  similar  situation  with  respect  to 
painters?  plumbers?  ditch-diggers? 

3.  At  a  given  time  are  artisans  of  equal  skill  paid  the 
same  wages  in  the  different  industries  ?  Why  or  why  not  ? 
Is  the  tendency  in  the  long  run  for  the  wages  of  equally 
skilled  artisans  in  different  industries  to  be  the  same? 
Why  or  why  not  ? 

4.  Point  out  some  peculiarities  relative  to  the  supply  of 
labor.     (Paragraphs  5-6.) 

5.  How  does  the  attitude  in  old  countries  relative  to  the 
increase  in  the  population  differ  from  that  held  in  new 
countries?     Explain  the  cause  of  this  difference. 

6.  Write  a  brief  account  of  the  life  of  T.  R.  Malthus. 

7.  What  was  the  Malthusian  theory  of  population? 
Make  an  argument  either  for  or  against  this  theory. 

8.  What  bearing  does  the  institution  of  private  property 
have  upon  the  number  of  births? 

9.  With  the  spread  of  knowledge  the  reproductive  in- 
stinct tends  to  divorce  itself  from  the  sexual  instinct.  One 
writer  says  that  the  effect  of  this  truth  is  "a  tendency 
toward  the  survival  of  the  unfittest."  What  does  he 
mean  ?     Is  he  correct  ? 

10.  What  is  the  limit  to  the  number  of  rabbits  in  Aus- 
tralia ?    Do  the  same  influences  limit  the  number  of  people  ? 

n.  If  the  maximum  human  birth-rate  were  constantly 
maintained,  what  would  be  the  effect  on  the  average  dura- 
tion of  life  ?     (Fetter.) 


428 


Introduction  to  Economics 


12.  The  population  of  Blank  City  is 


.     The  num- 
ber of  births  in  that  city  each  week  is  ,  thus  the 

number  of  births  a  year  is .     So  we  say  the  birth- 
rate is .     The  number  of  deaths  each  week  is , 


thus  the  number  of  deaths  a  year  is  

the  death-rate  is .     The  birth-rate  is 

the  death-rate  by  — 


So  we  say 

less     ,1 
,  than 

larger 

rjM  i  decrease    e 

per  cent.     The  annual  ._  of 


the  population  of  that  city  is 


increase 
Fill  in  the  blank 
spaces  and  cancel  such  words  as  may  not  be  necessary. 

13.  "From  the  following  and  similar  figures  a  German 
statistician  formulated  what  is  called  'Engel's  law,'  as  to 
the  proportion  of  the  expenditures  going  for  food." 

PER  CENT  SPENT  BY  FAMILIES  IN  SAXONY 


Food 

Clothing 

Shelter 

Fire  and  light 
Education. . . . 
Public  safety. 

Health 

Labor 


Labc 

)ring 

Middle  Class 

Well-to-do 

62' 

16 

12 

>95 

55' 
18 

12 

•  90 

5o' 

18 

12 

■85 

5 
2 

3- 

5 

5> 
5- 

5 

I 
I 

•    5 

2. 
2. 

>  10 

3- 
3- 

'  15 

I  | 

2. 

5> 

3- 

5; 

How  would  you  formulate  the  "law"? 


CHAPTER  XIX 
LABOR  AND  MACHINERY 

i.  Labor  defined.  2.  Labor,  direct  and  indirect.  3.  The  demand  for 
labor.  4.  Variety  of  demand.  5.  The  "make- work"  fallacy.  6.  Broken- 
pane  philosophy.  7.  "Good  for  the  trade."  8.  The  "lump-of-labor"  fal- 
lacy. 9.  Question  raised  by  the  introduction  of  machinery.  10.  The  la- 
borer's view-point.  11.  These  hardships  on  the  decline.  12.  Machinery 
and  market  demands.    13.  Machinery  improves  the  laborer.    14.  Exercises. 

i.  Labor  Defined. — It  seems  waste  space  to  define  labor, 
for  who  does  not  know  the  meaning  of  this  common  term  ? 
Common  terms  are  deceptive,  however,  and  lead  to  diffi- 
culty when  exposed  to  examination.  "Much  philosophy 
is  wanted  for  the  correct  observation  of  things  which  are 
before  our  eyes."  The  actor,  the  musician,  and  the  ball- 
player— do  these  labor  or  play?  They  both  play  and 
labor;  enjoyable  labor  is  play  and  remunerative  play  is 
labor. 

Again,  one  may  labor  for  another  receiving  a  contract 
wage,  or  he  may  drive  his  own  team,  till  his  own  soil,  keep 
his  own  shop,  thus  laboring  for  himself  for  such  income 
as  he  may  acquire. 

Furthermore,  labor  may  take  tangible  form  when  the 
builder  constructs  a  house,  or  the  product  may  be  intangi- 
ble as  the  service  of  the  physician  or  the  lawyer. 

What  is  more,  disagreeable  toil  does  not  define  labor. 
To  pile  stones,  then  to  no  purpose  repile  them,  would  be 
toil,  to  be  sure,  but  we  should  classify  the  toiler  in  another 
category  than  that  of  laborer.     Nor  is  pleasure  the  central 

429 


430  Introduction  to  Economics 

idea  in  the  definition  of  labor.  Because  idleness  is  a  dis- 
agreeable prick  to  the  conscience,  it  is  but  natural  to  find 
pleasure  in  fruitful  labor.  There  is  pleasure  without  labor, 
however,  in  amusement  and  entertainment. 

If  neither  pleasure  nor  pain  can  serve,  may  purpose 
serve  as  the  central  idea  in  labor?  The  farmer's  purpose 
is  good  and  the  rogue's  purpose  is  bad,  and  the  fool's  pur- 
pose is  misdirected;  no  one  finds  fault  with  the  dreamer's 
purpose,  but  is  he  laboring  who  squanders  time  and  relent- 
less toil  in  the  hopeless  task  of  securing  a  perpetual  mo- 
tion ?    Not  as  we  believe. 

Is  reward  a  safe  criterion  by  which  to  judge  what  is  and 
what  is  not  labor?  The  tourist  climbs  the  mountain  for 
pleasure  and  the  guide  for  pay.  The  two  perform  the 
same  act,  but  for  different  rewards;  it  is  newly  found  joy 
for  the  one  and  monotonous  toil  for  the  other.  Certainly 
the  guide  labors,  but  the  tourist  is  a  consumer  spending 
money  for  enjoyment.  Should  one  toil  diligently  for  a 
dishonest  paymaster  there  would  be  labor,  but  no  reward. 
A  turn  in  business  may  wipe  out  the  fruits  of  long  labor. 
On  the  contrary,  fortune  may  favor  the  idle  with  unearned 
rewards.  The  nature  of  reward  helps  little  in  the  defini- 
tion of  labor.     These  remarks  suggest  difficulty. 

Labor  is  productive  and  is  classified  among  productive 
agencies.  Production  we  have  found  to  be  the  creation 
of  desirabilities  and  utilities.  I  shall  define  labor  as  human 
ejfort,  mental  or  physical,  directed  toward  the  creation  of  de- 
sirabilities and  utilities.  This  definition  avoids  the  errors 
above  criticised,  and  places  labor  in  the  category  of  pro- 
ductive agencies. 

2.  Labor,  Direct  and  Indirect. — In  the  principles  of  cost- 
keeping  the  labor  element  of  cost  is  divided  into  two  classes. 


Labor  and  Machinery  431 

All  work  done  directly  upon  the  product  and  recognizable 
as  pertaining  only  to  the  operations  upon  it  is  called  direct 
labor.  But  there  is  much  facilitating  work  not  directly 
applied  to  any  particular  product.  Thus  in  factories  the 
fireman,  the  engineer,  the  oiler,  the  crane  men,  errand 
boys,  office  help,  etc.,  are  employed  in  activities  that  are 
general  and  not  specific,  or  the  time  that  they  are  em- 
ployed on  any  one  job  is  so  short  that  intelligent  distri- 
bution of  their  labor  is  uncertain.  Such  is  called  indirect 
labor. 

3.  The  Demand  for  Labor. — The  total  demand  for  labor, 
in  a  broad  sense,  consists  of  the  available  resources  which 
would  He  idle  apart  from  human  aid.  It  little  matters 
how  rich  the  mine,  how  fertile  the  soil,  how  luxurious  the 
grass,  how  invigorating  the  climate,  how  abundant  the 
coal,  or  plentiful  the  iron,  or  how  manifold  the  resources 
of  nature,  human  labor  must  co-operate  before  wealth  is 
produced.  If  resources  are  more  limited  in  Nevada  than 
in  Pennsylvania,  the  population  will  be  smaller  in  the 
former  because  the  demand  for  labor  is  larger  in  the  latter. 
Labor  is  one  of  the  necessary  agents  of  production  and 
where  other  such  agents  abound  there  labor  is  in  demand. 

Men  hire  labor  for  what  it  produces,  as  they  borrow 
money  for  what  it  buys;  the  motive  of  the  employer  is  in 
the  product  of  the  labor.  If  you  demand  a  good,  you  in- 
directly employ  labor,  for  the  good  is  the  product  of  labor. 

Labor  begets  labor,  because  the  product  of  one's  labor 
is  the  means  of  employing  more  labor.  When  all  produce 
for  the  market,  each  buys  goods  produced  by  another  and 
pays  for  them,  directly  or  indirectly,  with  his  own  prod- 
ucts. A  product  for  sale  is  a  demand  for  another  product, 
and  hence  a  demand  for  labor.     Every  producer  finds  the 


432  Introduction  to  Economics 

most  extensive  vent  for  his  wares  in  those  places  where 
most  wealth  is  produced. 

Could  the  laborer  see  that  each  additional  product  is 
equally  as  effective  as  is  the  employer's  pocketbook  in 
creating  a  demand  for  labor,  he  would  once  for  all  aban- 
don the  crude  philosophy  which  teaches  that  a  "limited 
output  increases  the  demand  for  labor."  The  laborer  is  a 
merchant  bargaining  for  the  sale  of  his  own  service.  Com- 
pare a  merchant's  opportunities  in  a  rich  town  with  those 
of  the  merchant  in  a  community  of  indolence  and  apathy. 
Sales  are  few  and  at  a  small  price  when  the  customers  have 
nothing  to  pay. 

4.  Variety  of  Demand. — The  demand  for  labor  is  co- 
extensive with  the  demand  for  goods  and  services.  When 
the  market  demand  for  goods  is  elastic,  so  also  is  the  market 
demand  for  labor.  For  the  labor  that  produces  staples, 
whose  volume  of  sale  varies  little  with  price  movements, 
the  condition  of  employment  is  comparatively  steady. 
Labor  is  uncertain  in  tenure  and  wages  fluctuate  more 
when  the  sale  of  the  product  depends  upon  a  varying  de- 
mand. Labor  is  called  upon  to  readjust  itself  when 
fashions  change,  when  bicycles  give  way  to  automobiles, 
when  temperance  closes  the  distilleries  and  breweries,  when 
war  gives  rise  to  munition-plants,  when  men  go  to  fight 
and  women  go  to  work. 

Fitting  workmen  into  the  industrial  system  and  fitting 
the  industrial  system  to  workmen  and  these  to  a  changing 
demand  is  a  grave  problem.  Crises  of  unemployment 
arise,  and  with  these  agitators  become  the  mouthpiece  of 
the  discontented;  industrial  strategy  fails,  thus  putting  the 
conservative  to  their  wits'  end,  while  revolutionary  social- 
ists take  the  stump  in  behalf  of  "justice  and  a  decent  wage." 


Labor  and  Machinery  433 

When  in  war  the  enemy  makes  a  surprise  attack  at  one 
point,  the  need  for  additional  troops  is  immediate,  but  it 
takes  time  to  supply  these  from  a  distant  field;  the  battle 
is  lost  because  the  supply  is  tardy  and  the  need  is  quick. 
So  also  an  abrupt  industrial  change  makes  a  hasty  de- 
mand for  labor,  but  much  time  is  required  to  marshal 
workers  from  accustomed  employments  and  school  them 
for  the  untried  task.  Some  suffer  privation  and  others 
reap  gain;  however,  the  misfortunes  of  the  oppressed 
would  rarely  be,  were  labor  adjustments  concurrent  with 
demand.  The  uneven  pace  of  labor  and  demand  gives 
rise  to  many  problems,  and  not  least  among  these  is  the 
uneven  pace  of  wages  and  prices.  Statistics  bear  out  this 
reasoning;  the  tendency  of  wages  is  to  follow  prices,  but 
a  curve  representing  the  rise  of  prices  mounts  more  rapidly 
and  declines  more  rapidly  than  does  the  curve  representing 
the  wages  of  labor. 

5.  The  "  Make-Work "  Fallacy. — Idleness  brings  dis- 
content to  labor,  for  to  deprive  the  workman  of  wages  is 
to  deny  him  the  necessities  of  life,  to  bring  humiliation 
upon  himself  and  his  family,  to  deaden  his  self-respect  and 
prepare  his  mind  for  acts  of  crime,  rapine,  and  violence. 
Rather  than  idle  workmen  with  the  consequent  discontent, 
revolutionary  socialism,  and  crime,  the  state  should  pro- 
vide work  at  the  public  expense,  even  if  this  work  creates 
no  useful  thing  or  renders  no  valuable  service.  It  would 
be  better  artificially  to  screen  the  skies  to  "make  work" 
for  the  candle-makers  than  to  have  these  men  walking  the 
streets  in  idleness. 

This  is  not  an  argument  for  a  make- work  policy;  the 
point  here  is  that  of  the  two  evils  the  make-work  idea  is 
less  than  that  of  idleness.     The  real  fallacy  in  the  "make- 


434  Introduction  to  Economics 

work"  idea  has  never  been  so  well  expressed  as  by  Frederic 
Bastiat.     He  brings  out  the  point  in  his  so-called — 

6.  Broken-Pane  Philosophy.1 — "Have  you  ever  had 
occasion  to  witness  the  fury  of  the  honest  burgess,  Jacques 
Bonhomme,  when  his  scapegrace  son  has  broken  a  pane  of 
glass  ?  If  you  have,  you  cannot  fail  to  have  observed  that 
all  the  bystanders,  were  there  thirty  of  them,  lay  their 
heads  together  to  offer  the  unfortunate  proprietor  this 
never-failing  consolation,  that  there  is  good  in  every  mis- 
fortune, and  that  such  accidents  give  a  fillip  to  trade. 
Everybody  must  live.  If  no  windows  were  broken,  what 
would  become  of  the  glaziers?  Now,  this  formula  of  con- 
dolence contains  a  theory  which  it  is  proper  to  lay  hold  of 
in  this  very  simple  case,  because  it  is  exactly  the  same 
theory  which  unfortunately  governs  the  greater  part  of 
our  economic  institutions. 

"Assuming  that  it  becomes  necessary  to  expend  six 
francs  in  repairing  the  damage,  if  you  mean  to  say  that  the 
accident  brings  in  six  francs  to  the  glazier,  and  to  that 
extent  encourages  his  trade,  I  grant  it  fairly  and  frankly, 
and  admit  that  you  reason  justly. 

"The  glazier  arrives,  does  his  work,  pockets  his  money, 
rubs  his  hands,  and  blesses  the  scapegrace  son.  That  is 
what  we  see. 

"But  if,  by  way  of  deduction,  you  come  to  conclude,  as 
is  too  often  done,  that  it  is  a  good  thing  to  break  win- 
dows— that  it  makes  money  circulate — and  that  encourage- 
ment to  trade  in  general  is  the  result,  I  am  obliged  to  cry, 
'Halt!'  Your  theory  stops  at  what  we  see,  and  takes  no 
account  of  what  we  don't  see. 

"We  don't  see  that  since  our  burgess  has  been  obliged 

Quoted  by  F.  A.  Walker.     Political  Economy,  pp.  321-322. 


Labor  and  Machinery  435 

to  spend  his  six  francs  on  one  thing,  he  can  no  longer  spend 
them  on  another. 

11  We  don't  see  that  if  he  had  not  this  pane  to  replace  he 
would  have  replaced,  for  example,  his  shoes,  which  are 
down  at  the  heels,  or  have  placed  a  new  book  on  his  shelf. 
In  short,  he  would  have  employed  his  six  francs  in  a  way 
in  which  he  cannot  now  employ  them.  Let  us  see,  then, 
how  the  account  stands  with  trade  in  general.  The  pane 
being  broken,  the  glazier's  trade  is  benefited  to  the  extent 
of  six  francs.     That  is  what  we  see. 

"If  the  pane  had  not  been  broken,  the  shoemaker's  or 
some  other  trade  would  have  been  encouraged  to  the 
extent  of  six  francs.  That  is  what  we  don't  see.  And  if  we 
take  into  account  what  we  don't  see,  which  is  a  negative 
fact,  as  well  as  what  we  do  see,  which  is  a  positive  fact,  we 
shall  discover  that  trade  in  general,  or  the  aggregate  of 
national  industry,  has  no  interest,  one  way  or  other,  whether 
windows  are  broken  or  not. 

"Let  us  see,  again,  how  the  account  stands  with  Jacques 
Bonhomme.  On  the  last  hypothesis,  that  of  the  pane 
being  broken,  he  spends  six  francs,  and  gets  neither  more 
nor  less  than  he  had  before,  namely,  the  use  and  enjoy- 
ment of  a  pane  of  glass.  On  the  other  hypothesis,  namely, 
that  the  accident  had  not  happened,  he  would  have 
expended  six  francs  on  shoes,  and  would  have  had  the 
enjoyment  both  of  the  shoes  and  of  the  pane  of 
glass. 

"Now  as  the  good  burgess,  Jacques  Bonhomme,  con- 
stitutes a  fraction  of  society  at  large,  we  are  forced  to  con- 
clude that  society,  taken  in  the  aggregate,  and  after  all 
accounts  of  labor  and  enjoyment  have  been  squared,  has 
lost  the  value  of  the  pane  which  has  been  broken." 


436  Introduction  to  Economics 

7.  "  Good  for  the  Trade." — The  make-work  idea  ap- 
pears in  many  forms:  "Blessed  is  that  country  where  the 
rich  are  extravagant  and  the  poor  are  economical.  A 
rich  spendthrift  is  a  blessing  and  a  rich  miser  is  a  curse; 
extravagance  is  a  splendid  form  of  charity.  Let  the  rich 
spend;  let  them  build;  let  them  give  work  to  their  fellow- 
men."     (R.  G.  Ingersoll.) 

Miss  Giulia  Morosini,  daughter  of  the  Italian  banker,  is 
reported  to  have  spent  $250,000  a  year  on  dress.  "One 
thousand  dollars,"  she  said,  "is  a  modest  price  to  pay  for 
a  gown,  and  I  have  many  that  cost  almost  five  thousand." 
She  was  "economical"  in  shoes,  using  only  forty  pairs  a 
year  at  an  average  cost  of  $50  each,  and  so  with  gloves 
and  handkerchiefs,  which  cost  only  $1,000  each  a  year. 
"For  lingerie  my  bill  last  year  amounted  to  $15,000. 
Stockings  at  $10  a  pair  and  corsets  at  $50  I  do  not  con- 
sider extravagant."  Upon  New  York's  far-famed  speed- 
way she  drove  her  "spiked"  team  of  three  horses,  which 
were  valued  at  $30,000,  while  the  superbly  appointed 
"turnout"  cost  $5,000.  How  justify  this  rank  extrava- 
gance? "It  is  all  good  for  the  trade,"  said  she.1  Miss 
Morosini,  like  Empress  Eugenie,  wore  no  pair  of  gloves 
more  than  once,  and  helped  other  industries  by  purchas- 
ing many  silks  and  laces. 

These  extravagances  are  good  for  the  trades  in  question. 
They  make  not  a  greater  but  a  less  demand  for  labor  as  a 
whole.  The  labor  and  capital  used  to  meet  these  extrava- 
gant demands  are  withdrawn  from  the  production  of  neces- 
sities. When  necessities  must  compete  with  extravagances 
for  labor  and  capital  there  will  be  fewer  improved  farms, 
fewer  herds  of  cattle,  fewer  railroads,  machine-shops,  and 

1  McCall's  Magazine,  April,  1909. 


Labor  and  Machinery  437 

factories.  When  a  people  turns  its  means  from  the  build- 
ing up  of  the  state's  productive  capacity  and  to  the  arts 
of  extravagant  consumption,  there  will  be  fewer  resources 
and  a  diminishing  demand  for  labor. 

8.  The  "  Lump-of-Labor  "  Fallacy. — The  lump-of-labor 
theory  is  based  upon  the  assumption  that  there  is  a  given 
amount  of  work  to  be  done;  if  one  group  of  laborers  does 
this  work  other  groups  are  unemployed,  and  if  machinery 
does  the  work  labor  goes  idle.  Consider  the  girl  at  the 
typewriter.  She,  as  the  rest  of  us,  desires  limited  compe- 
tition and  unlimited  consumption,  but  her  reasoning  leads 
to  gross  errors.  She  argues:  a  limited  number  of  girls  are 
needed  to  do  the  typewriting;  if  wealthy  girls  do  this  work 
the  injury  is  twofold — the  poor  are  unemployed,  and  in- 
come is  turned  from  those  in  need  only  to  further  add  to 
the  coffers  of  the  rich.  Thus  the  idleness  of  the  rich  is 
regarded  as  a  benefit  conferred  upon  the  poor. 

A  professor,  who  should  know  better,  argued  against 
fellowships  for  graduate  students  on  the  ground  that,  "we 
are  educating  too  many  for  the  profession  and  thereby 
lowering  our  own  salaries." 

We  are  here  taking  the  social-welfare  point  of  view.  It 
is  not  overlooked  that  the  employment  of  additional 
laborers  works  individual  hardships  in  numerous  cases. 

Even  the  economists  of  a  century  ago  reasoned  upon 
the  assumption  that  "man's  desires  are  limited  by  the  nar- 
row capacity  of  the  human  stomach."  They  must  have 
been  "lump-of-labor"  theorists,  for  we  produce  only  what 
we  desire  and  if  the  desire  is  definitely  fixed  so  also  must 
be  the  work. 

We  now  know  that  desires  are  dynamic,  not  fixed,  that 
the  more  we  feed  them  the  more  rapidly  they  multiply 


438  Introduction  to  Economics 

and  grow.  The  greatest  welfare  exists  where  there  is 
most  to  gratify  our  desires;  then,  on  the  whole,  it  is  to  the 
interest  of  laboring  poor  that  the  rich  be  productively 
employed. 

Were  all  idle,  production  would  cease  and  starvation 
would  result.  Were  half  of  our  laborers  to  become  idle, 
the  result  would  be  depopulation,  misery,  and  returning 
barbarism.  Every  idle  person,  rich  or  poor,  is  a  contribu- 
tion to  this  miserable  end.  The  poor  girl  should  not  con- 
demn her  rich  competitor  for  her  labor,  because  she  in 
reality  creates  the  means  for  paying  herself.  "She  adds 
before  she  divides,  deducts  only  as  she  adds,  and  competes 
only  as  she  co-operates."  The  consumer  only  detracts, 
while  the  producer  adds  to  the  sum  of  goods  divisible. 
There  cannot  be  too  much  produced  and  our  dread  is  of 
underproduction  rather  than  overproduction. 

If  we  desire  more  wealth  we  are  forced  to  desire  the 
employment  of  more  productive  effort.  If  we  object  to 
more  labor  coming  into  the  field,  we  are  forced  to  object 
to  a  further  use  of  machinery.  The  poor  girl  who  objects 
to  the  competition  of  the  rich  girl  in  typewriting  is  forced 
to  object  to  the  use  of  the  typewriting-machine  she  em- 
ploys. 

9.  Questions  Raised  by  the  Introduction  of  Machinery. — 
Patent  laws  are  such  that  the  machinery  invented  in  one 
country  may  be  used  throughout  the  civilized  world; 
Americans,  therefore,  do  not  use  most  machinery  because 
our  people  are  most  inventive.  Germany  makes  the  most 
extensive  use  of  many  American  inventions.  Then  why 
is  machinery  so  extensively  used  in  some  countries  and 
so  little  used  in  others  ?  Differences  in  the  wages  of  labor 
is  the  answer.     It  is  cheaper  to  use  machinery  in  America, 


Labor  and  Machinery  439 

where  wages  are  high,  and  cheaper  to  employ  labor  in 
China  where  wages  are  low. 

If  labor-saving  machinery  is  used  as  a  substitute  for 
costly  labor,  does  it  not  follow  that  machinery  directly 
competes  with  and  lowers  the  wages  of  labor?  This  has 
been  a  standing  question  since  the  beginning  of  the  Indus- 
trial Revolution;  it  is  a  most  important  and  fair  question, 
deserving  thoughtful  reply.  At  one  time  the  wage-earners 
answered  this  in  the  negative,  and  smashed  machinery 
because  they  thought  it  robbed  them  of  a  living  wage. 

If  we  take  the  consumer's  point  of  view,  we  at  once 
favor  machinery  because  it  augments  production,  lowers 
prices,  and  enables  our  money  to  purchase  more  goods. 
But  we  are  here  taking  the  laborer's  point  of  view  who  is 
interested  to  know  the  effect  of  machinery  upon  the  de- 
mand for  labor. 

Temporary  effect :  The  entrepreneur  introduces  machin- 
ery for  two  reasons — to  increase  and  hasten  his  volume  of 
output,  to  lower  his  cost  of  production.  Within  a  short 
period  of  time  the  demand  for  any  particular  class  of  goods, 
say  wire  nails,  will  vary  little.  But  a  sudden  introduction 
of  machinery  would  enable  the  number  of  laborers  who 
have  been  regularly  employed  in  that  business  to  over- 
supply  the  market.  The  first  effect  of  this  machinery  will 
be  the  displacement  of  a  portion  of  the  labor. 

Bearing  witness  to  this  fact  are  the  uprisings  in  Asiatic 
Turkey  since  American  machinery  invaded  those  ancient 
lands  in  1902.  The  Bible  and  ancient  history  make  record 
of  vast  supplies  of  grain  from  those  fertile  lands  in  ages 
now  remote.  Through  all  these  centuries  grain  had  been 
reaped  by  hand  and  threshed  by  oxen  driven  around  in  a 
circle.     The  first  reaper  created  a  sensation,  the  greatest 


440  Introduction  to  Economics 

since  Mohammed  preached  his  new  religion,  and  all  but 
produced  a  state  of  riot  among  the  Arabs,  who  declared 
that  it  left  nothing  for  them  to  glean. 

Will  the  entrepreneur  turn  off  all  but  a  sufficient  number 
of  working  men  to  maintain  the  volume  of  output  as  it 
was  prior  to  the  installation  of  machinery?  The  answer 
must  depend  in  part  upon  the  nature  of  the  product. 

The  nature  of  the  product :  If  the  product  is  one  for  which 
the  demand  is  inelastic,  the  chances  are  that  a  consider- 
able portion  of  the  labor  will  not  be  retained.  Should  the 
commodity  be  one  for  which  the  demand  is  very  elastic, 
the  employer  will  retain  the  larger  portion  of  his  labor. 
By  lowering  the  price  he  could  dispose  of  a  larger  volume 
of  output,  and  that  at  a  handsome  profit  until  other  com- 
petitors entered  the  field. 

If  the  entrepreneur  enjoys  a  monopoly  he  will  continue 
the  employment  of  such  a  supply  of  labor  as  will  fix  the 
volume  of  output  at  the  point  of  greatest  net  return.  This, 
again,  will  depend  upon  the  elasticity  of  demand.  In  com- 
petitive industries,  where  the  cost  per  unit  of  output 
diminishes  with  the  increasing  size  of  the  business,  cut- 
throat competition  is  such  as,  in  many  cases,  to  actually 
increase  the  demand  for  labor.  Within  a  century  machin- 
ery increased  the  productive  power  of  labor  approximately 
one-hundredfold  in  the  textile  trade,  yet  the  number  of 
laborers  increased  in  that  industry  because  of  the  elasticity 
of  the  demand.  In  this  case,  as  in  the  case  of  the  monopo- 
list, the  volume  of  production  is  enlarged  and  labor  retained 
in  anticipation  of  an  increased  demand.  Generally  speak- 
ing, the  temporary  effect  of  machinery  in  a  particular 
industry  is  to  displace  labor  unless  the  product  fills  a  very 
elastic  demand. 


Labor  and  Machinery  441 

A  misconception  of  the  labor-saving  machine  :  Some  critics 
attempt  to  prove  that  the  introduction  of  machinery  does 
not  even  temporarily  lower  the  total  demand  for  labor. 
Consider  the  manufacture  of  shoes;  they  say  that  while 
the  new  machine  displaces  a  number  of  hand  laborers  it 
also  takes  a  number  of  laborers  to  build  the  machine.  As 
labor  is  reduced  in  making  shoes,  it  is  correspondingly  in- 
creased in  the  production  of  machinery.  But,  let  us  ask 
these  critics,  in  what  sense  may  we  speak  of  labor-saving 
machinery  if  machinery  saves  us  no  labor?  There  would 
certainly  be  no  advantage  in  producing  agricultural  imple- 
ments if  the  labor  required  to  produce  these  were  the  equiv- 
alent of  the  labor  they  save  the  farmer. 

Long-time  effects :  If  we  study  particular  industries 
rather  than  the  whole  field  of  labor,  we  find  results  vary- 
ing with  the  nature  of  the  product.  It  is  but  natural  that 
over  long  periods  of  time  the  demand  will  increase  for  all 
the  different  kinds  of  goods.  Even  those  staples  which 
satisfy  the  primary  needs  will  meet  an  increasing  demand. 
Salt  fills  a  most  inelastic  demand,  yet,  should  the  popula- 
tion double,  the  need  for  salt  would  be  multiplied  by  two. 
Can  we  say,  however,  that,  despite  the  development  in 
the  use  of  labor-saving  machinery,  the  demand  for  labor 
will  keep  pace  with  the  growing  demand  for  products? 
Certainly  not;  it  would  be  a  contradiction  in  thought  to 
answer  this  question  affirmatively.  In  no  sense,  where 
labor-saving  machinery  is  employed,  will  the  demand  for 
labor  increase  as  rapidly  as  the  increase  in  the  production 
of  and  demand  for  goods. 

How  machinery  enlarges  the  demand  for  labor :  It  is  in  a 
broader  sense  that  the  introduction  of  labor-saving  ma- 
chinery calls  for  an  increase  in  the  supply  of  labor.     Im- 


442  Introduction  to  Economics 

proved  means  of  production  has  a  double  effect:  to  illus- 
trate, it  makes  shoes  cheaper,  thereby  enabling  the  pur- 
chaser to  increase  his  demand  for  other  things,  say  gloves; 
it  frees  a  certain  amount  of  labor  from  the  shoe  business 
to  go  into  other  lines  of  business,  say  the  glove  business. 

If  the  demand  for  a  good  is  very  elastic,  the  first  effect 
of  labor-saving  machinery  will  be  to  cheapen  the  product; 
this  will  be  followed  by  an  increased  demand.  If  the 
growth  in  demand  is  sufficient,  it  will  actually  increase  the 
demand  for  labor,  but  never  in  proportion  to  the  increasing 
volume  of  product.  The  railway-train  has  supplanted  the 
stage-coach  and  has  set  many  men  to  work  where  the  old 
coach  employed  one,  but  the  amount  of  traffic  has  increased 
more  rapidly  than  has  the  number  of  railway  employees. 
Thus,  where  the  demand  is  elastic,  the  amount  of  labor  in 
a  single  industry  may  be  increased  because  of  labor-saving 
improvements  in  that  industry. 

The  usual  effect  of  cheapening  the  products  of  one  in- 
dustry is  to  create  a  demand  for  the  products  of  another 
industry.  If  a  smaller  portion  of  my  wage  goes  to  pur- 
chase the  common  necessities,  I  have  more  with  which  to 
demand  the  higher  comforts  and  even  the  luxuries  of  life. 
This  new  demand  gives  rise  to  other  industries,  thereby 
making  a  new  demand  for  labor. 

io.  The  Laborer's  View-Point. — The  owner  of  large  ma- 
chinery must  be  a  man  of  means,  and  when  it  was  intro- 
duced into  industry  a  sharp  division  was  made  between 
the  capitalists  and  laborers.  This  division  put  an  end  to 
the  companionship  of  the  employer  and  his  hired  man. 
They  no  longer  worked  side  by  side  at  the  same  task,  the 
worker  quit  living  in  his  employer's  home,  quit  eating  at 
the  same  table  and  sharing  the  same  fireside.     They  be- 


Labor  and  Machinery  443 

came  estranged.  Their  interests,  in  a  narrow  sense,  grew 
antagonistic;  the  employer  bought  labor  with  the  same 
merciless  interest  as  he  would  buy  raw  materials,  and  the 
laborer's  interest  in  his  employer's  welfare  was  nil.  The 
one  wanted  to  perform  the  least  labor  for  the  most  pay; 
the  other  wanted  to  give  the  least  pay  for  the  most  labor. 

Readjustments  cancel  personal  skill:  The  entrepreneur 
would  reduce  cost  by  introducing  machinery,  and  consum- 
ers welcome  machinery  because  its  effect  is  to  lower  prices. 
It  is  easy  enough  for  these  to  admonish  the  worker  to  be 
patient,  to  preach  the  ultimate  good  of  machinery  as  a 
"long-run"  benefit  to  labor  and  society  in  general.  We 
must  not  be  too  hasty,  however,  to  pronounce  the  worker 
an  imbecile  who  objects  to  machinery.  He  lives  in  a  state 
of  merciless  competition;  he  is  forced  to  specialize  in  a 
trade;  life  is  too  short  for  the  average  man  to  master  more 
than  one  trade;  he  lives  from  hand  to  mouth  and  his  daily 
labor  means  his  daily  bread.  His  personal  ruin  and  the 
poverty  of  his  family  result  if  machinery  removes  him 
from  work. 

Society  sees  labor  as  a  whole  and  in  the  long  run  it  re- 
gards the  individual's  misfortune  as  a  mere  incident  of  prog- 
ress. The  masses  of  men,  among  them  the  laborers,  do  not 
act  upon  the  long-run  motive.  Moreover,  what  promise 
has  the  long  run  for  one  who  is  forced  to  starve  now?  If 
progress  takes  his  job,  the  same  progress  should  provide 
his  support.  The  facts  are  that  machinery  has  displaced 
many  thrifty  laborers  and  reduced  them,  with  their  families, 
to  misery.  When  the  burden  falls  solely  upon  those  who 
are  least  prepared  to  bear  it,  there  is  little  wonder  that 
they  remonstrate.  If  through  patient  toil  they  acquire 
skill  in  a  trade,  machinery  cancels  this  skill;  the  burden  is 


444  Introduction  to  Economics 

not  less  than  if  the  state  should  cancel  their  rights  of  pri- 
vate property  in  the  fruits  of  their  labor. 

ii.  These  Hardships  on  the  Decline. — At  first  thought 
one  reasons  that  if  the  introduction  of  labor-saving  ma- 
chinery works  hardship,  this  evil  must  grow  with  the 
expansion  of  the  machine  process.  But  this  reasoning  is 
in  error.  There  is  a  vast  difference  between  going  from  a 
hand  process  to  a  machine  process,  and  that  of  going  from 
one  kind  of  machine  to  another.  It  was  the  old-time  cob- 
bler who  was  in  serious  difficulty  when,  for  the  first  time, 
he  raised  his  spectacles  from  the  accustomed  awl,  peg,  and 
last  to  behold  the  new  innovation — a  revolutionized  indus- 
trial world  replete  with  competing  machinery.  Students 
of  the  problem  go  back  to  the  Industrial  Revolution  for 
their  examples  of  the  extreme  hardships  which  machinery 
imposes.  Certainly  we  find  here  and  there  such  hardships 
in  our  time,  but  fortunately  they  are  on  the  decline. 

The  majority  of  laborers  now  use  machinery  of  some 
kind,  and,  since  there  are  only  a  few  principles  of  machin- 
ery, it  follows  that  a  thorough  acquaintance  with  one 
machine  makes  it  easy  for  the  laborer  to  transfer  to  another 
and  new  type  of  machine.  Consider,  for  instance,  how 
general  has  become  the  use  of  the  gas-engine,  how  varied 
the  types  of  machines  now  run  by  it:  the  workman  who 
learns  to  operate  one  such  engine  can  with  ease  adapt 
himself  to  any  one  of  a  large  number  of  positions.  The 
same  is  true  of  the  steam-engine,  and  it  is  likewise  true  of 
electric  power. 

12.  Machinery  and  Market  Demands. — The  large  pro- 
ductive plants  of  to-day  require  enormous  quantities  of 
fixed  capital.  The  heavy  machinery  which  is  installed  is 
built  for  a  specialized  type  of  production.  The  entre- 
preneur is  anxious  to  keep  this  machinery  fully  employed, 


Labor  and  Machiriery  445 

and  it  is  to  his  interest  to  keep  intact  a  large  force  of  trained 
workmen.  Then  the  first  effect  of  large  machinery  is  to 
secure  the  tenure  and  stabilize  the  conditions  of  workmen. 

As  new  transporting  facilities  develop,  the  market  is 
extended.  Industrial  plants  expand  apace  in  size  with  the 
extension  of  the  market;  they  come  to  produce  no  longer 
for  a  local  market  but  for  a  world  market,  and  no  longer 
for  the  demand  of  the  immediate  future,  but  for  the  de- 
mand of  the  distant  future.  Thus  in  adjusting  productive 
capacity  to  demand,  large  capital  is  sunk  in  more  or  less 
fixed  forms. 

Now  contemplate  the  effect  of  a  far-reaching  change  in 
demand.  This  fixed  machinery  must  come  to  a  standstill 
when  the  demand  turns  from  its  product,  and,  as  for  labor, 
it  must  either  shift  to  produce  for  the  newly  created  de- 
mand or  go  idle.  A  vast  change  in  the  market,  therefore, 
finds  fixed  capital  more  helpless  in  making  a  shift  than  is 
the  case  with  labor. 

There  is  another  thought  which  claims  serious,  if  only 
brief,  attention.  No  principle  of  demand  is  better  estab- 
lished than  this:  the  demand  for  comforts  and  luxuries 
fluctuates  more  than  the  demand  for  prime  necessities. 
Considering  the  working  population  as  a  whole,  investi- 
gators find  that  an  effect  of  machinery  is  a  relative  decline 
in  the  number  of  workmen  producing  necessities,  and  that 
the  relative  proportion  of  those  who  produce  comforts  and 
luxuries  is  on  the  increase.  The  cumulative  effect  of 
machinery,  therefore,  is  to  subjugate  labor  more  and  more 
to  the  vicissitudes  of  demand. 

13.  Machinery  Improves  the  Laborer.1 — The  handling  of 
the  old  jack-plane  used  to  cause  heart-disease,  and  made 

1  Read  Alfred  Marshall's  Principles  of  Economics,  sixth  edition,  Book  IV, 
chap.  IX. 


446  Introduction  to  Economics 

carpenters,  as  a  rule,  old  men  by  the  time  they  were  forty. 
When  Adam  Smith  wrote  (1776),  men  overworked  them- 
selves, ruining  their  health  and  constitution  in  a  few  years. 
"A  carpenter,"  said  that  famous  author,  "in  London,  and 
in  some  other  places,  is  not  supposed  to  last  in  his  utmost 
vigor  above  eight  years.  Almost  every  class  of  artificers 
is  subject  to  some  particular  infirmity  occasioned  by  exces- 
sive application  to  their  peculiar  species  of  work."1  Only 
a  few  years  ago  excessive  muscular  strain  was  the  common 
lot  of  the  majority  of  working  men  in  England  and  else- 
where. 

The  effect  of  machinery  is  to  relieve  muscular  strain  and 
to  perform  tasks  which  are  beyond  human  strength.  In 
the  making  and  handling  of  armor-plates,  heavy  munitions, 
and  structural  steel,  man's  muscles  count  for  nothing. 
Machinery  makes  lighter  the  work  of  housekeepers,  makes 
easier  all  types  of  manufacturing,  and  it  displaces  muscular 
strain  in  all  the  extractive  industries. 

Machinery  also  relieves  the  monotony  of  life.  Mention 
has  been  made  of  the  way  in  which  the  technical  division 
of  labor  in  modern  industry  narrows  the  scope  of  each 
person's  work.  In  those  trades  where  there  is  the  most 
subdivision  of  work,  the  individual's  task  is  most  narrow; 
he  exercises  the  same  faculties  and,  without  variance  of 
motion,  repeats  the  monotonous  routine  year  in  and  year 
out.  At  first  while  he  learns  the  simple  movements  he  is 
required  to  use  judgment  in  performing  them,  then  he 
practises  these  until  they  become  habitual.  Thereafter  is 
only  the  monotony  of  constant  repetition.  Such  work 
depletes  men  both  mentally  and  physically,  for  develop- 
ment is  arrested  apart  from  variety  in  thought  and  mus- 
cular activity. 

1  Quoted  by  Marshall,  Idem,  p.  262. 


Labor  and  Machinery  447 

Fortunately,  however,  these  monotonous  and  routine 
tasks  are  most  sure  to  be  taken  over  by  inventions.  As 
soon  as  the  motion  becomes  constant  and  unvarying,  the 
task  of  the  inventor  is  simplified.  Thus  machinery  both 
relieves  the  strain  on  human  muscles  and  prevents  the 
monotony  of  work  from  involving  monotony  of  life. 

14.  Exercises. — 1.  A  tourist  and  his  guide  climb  a  moun- 
tain— the  one  for  pleasure,  the  other  for  pay.  Is  either  or 
are  both  laboring?  The  workers  on  the  tower  of  Babel, 
which  was  designed  to  reach  into  heaven,  got  pay.  Did 
they  labor?     If  so,  was  it  productive  labor? 

2.  In  a  building  concern  does  a  bricklayer  perform 
direct  or  indirect  labor?     What  of  the  bookkeeper? 

3.  "The  more  limited  the  output  of  each  laborer,  the 
greater  will  be  the  demand  for  additional  laborers."  Dis- 
cuss. 

4.  How  may  individual  and  industrial  hardships  arise 
from  the  fact  that  labor  adjustments  are  slow,  whereas 
changes  in  the  demands  for  the  products  of  labor  may  be 
rapidly  made  ? 

5.  Define  and  illustrate  the  "make-work  fallacy." 
Assume  that  the  2,000,000  soldiers  who  return  from  France 
will  either  remain  idle  for  twelve  months  or  will  be  employed 
at  a  good  wage  in  unproductive  effort.  Which  would  be 
better? 

6.  Would  machinery  increase  or  decrease  the  real  wages 
of  labor  in  a  new  country,  say  Australia?  in  an  overcrowded 
country,  say  Sicily? 

7.  Prove  this  statement:  It  is  to  the  interest  of  the 
laboring  poor  that  the  rich  be  productively  employed. 
Prove  this:  It  is  to  the  interest  of  the  poor  that  the  rich 
spend  their  means  in  productive  enterprises  rather  than 
for  luxurious  entertainments. 

8.  Criticise  this:  "  My  automobile  is  a  necessary  luxury." 

9.  What,  generally  speaking,  is  the  difference  between 
the  temporary  effects  and  the  long-time  effects  of  the  intro- 
duction of  machinery  upon  the  demand  for  labor? 


448  Introduction  to  Economics 

10.  Would  the  conditions  of  labor  in  a  single  industry 
be  affected  more  or  less  if  the  demand  is  very  elastic  for 
the  products  of  that  industry  ? 

ii.  How  did  the  introduction  of  large  machinery  change 
the  relationship  between  the  laborer  and  the  employer? 

12.  The  hardship  which  the  introduction  of  machinery 
imposed  upon  labor  was  that  of  unemployment,  but  this 
hardship  is  on  the  decline  even  though  more  and  more 
machinery  is  coining  into  use.     Why  is  this  so  ? 


CHAPTER  XX 
THE  PRINCIPLES  OF  WAGES 

i.  Wages  defined.  2.  Problems  suggested.  3.  Wages  differ  from  profits. 
4.  Real  and  money  wages.  5.  The  wage-fund  doctrine.  6.  The  wage 
problem  is  forward-looking.  7.  Effect  of  machinery  upon  wages.  8.  Simi- 
larity of  wages  and  rent.  9.  The  same  principles  for  unlike  agents.  10. 
How  relative  rents  are  determined,  n.  How  relative  wages  are  deter- 
mined. 12.  Thought  and  execution.  13.  To  illustrate.  14.  The  wage 
system  in  proportionality.  15.  The  bargain  theory.  16.  The  wage  sys- 
tem. 17.  Equal  wages  for  equal  tasks.  18.  Wages  equal  the  marginal 
product  of  labor.     19.  The  time  element.     20.  Exercises. 

i.  Wages  Defined. — A  wage  is  a  price;  it  is  the  price 
paid  by  one  person  to  another  on  account  of  labor  per- 
formed. The  employer  agrees  to  pay  the  workman  so 
much  per  piece  or  unit  of  output,  or  agrees  to  pay  him  a 
sum  certain  per  hour,  day,  week,  or  month.  The  one  pay- 
ment is  called  a  piece  wage;  it  is  payment  for  the  amount 
of  work  performed  irrespective  of  the  time  expended.  If 
the  laborer  is  making  bolts  at  a  piece  rate  of  20  cents  he 
would  receive  $i  for  an  output  of  five,  $6  for  an  output  of 
thirty,  and  so  on.  The  other  method  of  payment  is  called 
a  time  wage.  If  the  employee  is  paid  $3  per  day,  his  pay 
would  be  neither  more  nor  less,  whether  his  output  be  five 
or  thirty  bolts  per  diem.  All  other  wage  systems,  such  as 
profit-sharing  or  gain-sharing,  are  combinations  of  time 
and  piece  wages. 

2.  Problems  Suggested. — Where  large  numbers  of  work- 
men are  employed  and  the  personal  relations  between  the 
employer  and  workmen  vanish,  all  laborers  in  a  group 

receive  the  same  wage.     The  most  superior,  even  should 

449 


450  Introduction  to  Economics 

he  exert  himself  to  the  utmost,  receives  the  same  time 
wage  as  the  most  inferior  workman.  The  first  effect  is  to 
kill  the  incentive  of  the  superior  workman.  Another  effect 
is  that  the  better  men,  unwilling  to  accept  a  wage  fixed  by 
the  inefficiency  of  the  poorest,  organize  unions  to  force 
from  the  employer  a  compensation  in  keeping  with  their 
work. 

The  records  of  day  work  as  a  guide  in  setting  piece  rates : 
The  piece  wage,  when  first  introduced,  must  be  roughly 
adjusted  to  the  time  wage.  For  instance,  the  average 
worker  is  paid  $3  a  day  and  turns  out,  say,  fifteen  bolts  in 
a  normal  day's  work.  The  day  wage  would  be  the  equiva- 
lent of  a  piece  wage  of  20  cents  Upon  this  basis  the  piece 
wage  is  fixed  at  20  cents.  Now  in  contrast  with  the  day 
wage,  which  tends  to  deaden  incentive,  the  piece  wage 
stimulates  workmen  to  the  highest  pitch.  Instead  of  fif- 
teen bolts  the  better  men  produce  thirty  or  even  forty,  and 
raise  their  income  from  $3  to  $6  or  $8. 

Tendency  to  cut  rates:  Our  first  thought  turns  in  praise 
to  the  piece  wage  as  better  for  all;  better  for  the  workmen, 
because  it  raises  their  wages  and  pays  them  according  to 
their  deserts;  and  better  for  the  employer  because  it  in- 
creases his  volume  of  output  in  a  given  time,  and  that, 
too,  with  little  addition  to  his  overhead  expenses.  Nu- 
merous examples  from  experience,  however,  make  us  less 
cheerful.  The  employer  sees,  with  unwilling  eye,  that  his 
labor  is  paid  an  amount  excessive  as  compared  with  the 
daily  wage  of  the  average  workman.  Either  through 
cupidity,  or  because  he  really  believes  the  worker  receives 
more  than  his  fair  share  of  the  product,  the  employer  has 
"cut"  and  "recut"  the  piece  wage  to  lower  the  earnings 
of  labor.     To  take  an  example  from  the  willowing  of  ostrich 


The  Principles  of  Wages  451 

feathers:  "When  the  trade  started  few  knew  how  to  willow, 
and  15  cents  was  paid  for  tying  one  set  of  knots  (one 
inch).  The  following  season  more  workers  were  in  the 
field,  and  the  price  went  down  to  13  cents  an  inch.  Then 
it  dropped  to  1 1  cents,  9  cents,  7  cents,  5  cents,  and  finally 
the  workers  received  but  3  cents  an  inch." 

If  at  the  "cut"  rate  the  workman  attempts  to  increase 
his  output  to  retain  his  income,  the  covetous  desire  of  the 
employer  sees  a  double  advantage — less  wages  paid  out, 
and  more  work  turned  in.  Is  all  this  to  the  encourage- 
ment of  labor?  Certainly  not,  for  penalized  effort  is 
grudgingly  given. 

The  reaction  of  the  laborer:  The  first  reaction  of  the 
laborer  is  to  work  less  strenuously,  for  if  wages  are  lowered 
with  the  increase  of  output,  why  not  diminish  the  output 
and  receive  a  larger  wage  per  piece  ?  His  next  reaction  is 
to  turn  to  organization  as  a  means  of  securing  by  might 
what  should  be  his  by  right.  There  are  still  other  objec- 
tions to  the  piece  wage. 

Risk:  There  is  no  risk  in  time  wages  as  to  the  amount 
the  laborer  shall  receive;  let  conditions  vary  as  they  will, 
his  income  is  fixed  by  contract.  The  same  is  not  true  for 
those  employed  at  a  piece  wage.  Whatever  the  conditions, 
they  receive  in  proportion  to  product.  Unforeseen  contin- 
gencies arise,  machines  break  down,  or  raw  materials  fail 
to  appear;  in  all  such  cases  the  loss  falls  upon  the  laborer. 

The  disfavor  of  unions:  The  piece  wage  puts  each  worker 
upon  his  own  mettle,  appeals  to  his  self-interest  or  personal 
ambition,  and  breaks  down  the  co-operative  spirit  upon 
which  unions  depend.  The  spirit  aroused  is  that  of  com- 
petition, discord,  and  suspicion  among  workmen  rather 
than   the   fraternal   spirit  of  brotherly   benevolence   and 


452  Introduction  to  Economics 

good-will.  It  thus  breaks  the  union's  grip  of  the  labor- 
supply  and  is,  in  consequence,  condemned  by  the  union. 

A  cause  of  overexertion:  "Chips  fly  faster  by  job  work 
than  by  day  work."  The  "driving"  or  "speeding-up" 
process  seems  to  characterize  the  system.  Those  who  are 
in  need,  or  who  are  ambitious  to  get  ahead  in  the  world, 
are  anxious  to  produce  to  their  maximum  capacity.  They 
sometimes  overdo  thus  enfeebling  their  health  and 
strength. 

Despite  these  objections,  the  piece  wage  is  the  only 
feasible  plan  in  many  kinds  of  factory  work.  As  the  de- 
fects of  the  system  become  better  known  they  are  corrected; 
managers  seek  to  obtain  accurate  knowledge  before  adjust- 
ing rates  of  pay  and,  if  right-minded,  aim  to  fix  and  main- 
tain the  pay  at  a  fair  and  just  rate. 

3.  Wages  Differ  from  Profits. — Two  men,  the  one  a 
renter  and  the  other  employed,  may  do  precisely  the  same 
thing,  may  hoe  side  by  side  in  the  same  potato-patch,  may 
perchance  receive  incomes  exactly  equivalent  for  their  ser- 
vices, and  yet  the  one's  income  is  profits  and  that  of  the 
other  is  wages.  Does  it  follow  that  wages  and  profits  are 
essentially  the  same?     They  essentially  differ. 

The  first  undergoes  all  the  risk;  he  pays  rent  for  the 
land  and  wages  for  his  help,  and  buys  his  seed,  tools,  fer- 
tilizer, and  gives  his  own  time.  Between  the  plow  and  the 
potato-digger  there  is  chance  of  frost,  or  devouring  bugs, 
or  drought,  or  excessive  rain,  and  then  there  are  market 
conditions  after  the  crops  to  cause  apprehension.  He 
takes  his  chances  with  the  trinity  of  weather,  pests,  and 
prices  for  such  income  as  he  may  receive.  The  second 
runs  no  risk,  but  works  for  a  definitely  fixed  contractual 
wage.     There  are  other  differences:  unlike  motives  actuate 


The  Principles  of  Wages  453 

these  two  men;  the  one  shoulders  the  responsibility  and 
the  other  is  care-free;  the  actions  of  the  one  are  self-willed, 
and  the  actions  of  the  other  are  directed.  To  call  one's 
own  product  a  wage  does  not  conform  to  business  ter- 
minology. 

The  wage  problem,  encompassing,  as  it  does,  a  multi- 
tude of  troublesome  questions,  arises  from  the  relationship 
between  the  hired  man  and  his  employer.  He  who  works 
for  himself  never  strikes,  or  boycotts,  or  pickets  the  busi- 
ness. He  does  not  go  to  law  for  a  higher  wage  or  for 
shorter  hours  or  for  improved  living  conditions.  For  pur- 
poses of  sound  reasoning  we  must  distinguish  between 
these  two  types  of  income.  Term  them  profit  and  wages, 
and  you  have  a  distinction  conforming  to  business  usage 
and  to  the  theory  of  the  case;  you  have  cleared  the  ground 
for  a  discussion  of  the  practical  problems  which  are,  in 
fact,  contract-wage  problems. 

4.  Real  and  Money  Wages. — Money  wages  refer  to  the 
content  of  the  pay-envelope,  to  the  number  of  dollars  the 
wage-earner  receives.  By  real  wages  is  meant  not  the 
number  of  dollars,  but  the  amount  of  purchasing  power 
received.  Money  wages  may  remain  the  same,  while  real 
wages  vary  because  of  price  movements.  Suppose  one  has 
received  an  annual  salary  of  $2,000  for  a  period  of  five 
years,  and  that  meanwhile  prices  have  doubled.  His 
money  wage  or  salary  has  not  changed,  but  his  real  wages 
have  been  reduced  by  half.  In  discussing  the  wage  prob- 
lem real  wages  are  far  more  important  than  are  money 
wages. 

5.  The  Wage-Fund  Doctrine. — Having  defined  wages, 
let  us  now  turn  to  an  examination  of  the  influences  which 
determine  the  amount  of  wages.     The  older  British  econ- 


454  Introduction  to  Economics 

omists,  as  well  as  some  American  writers,  have  championed 
the  crude  and  now  abandoned  Wage-Fund  Doctrine.  The 
doctrine  is  simple  and  lends  itself  to  brief  statement:  At 
any  one  time  there  is  a  certain  amount  of  funds,  no  more 
and  no  less,  set  aside  with  which  to  pay  the  wages  of  labor. 
J.  S.  Mill  says:  "This  sum  is  not  regarded  as  unalterable, 
for  it  is  augmented  by  saving,  and  increases  with  the 
progress  of  wealth;  but  it  is  reasoned  upon  as,  at  any  given 
moment,  a  predetermined  amount."  The  Englishman, 
H.  Fawcett,  says:  "The  circulating  capital  of  a  country  is 
its  wage-fund.  Hence,  if  we  desire  to  calculate  the  aver- 
age money  wages  received  by  each  laborer,  we  have  simply 
to  divide  the  amount  of  this  capital  by  the  number  of  the 
laboring  population." 

Then,  at  any  one  time,  there  is  a  predetermined  amount 
of  funds  that  is  going  to  be  paid  to  labor.  It  is  impossible 
for  the  laborers  to  receive  one  penny  more  or  less.  This 
fund  is  the  dividend,  and  the  number  of  laborers  the 
divisor,  and  the  quotient  is  the  average  wage.  If  the  fund 
be  100,000  and  the  number  of  laborers  1,000,  the  average 
wage  will  be  100,000  -S-  1,000  =  100. 

Thus  the  learned  economists  of  England  left  the  prob- 
lem. The  scholars  looked  upon  this  as  a  simple  arithmetical 
truism,  not  subject  to  criticism.  It  would  be  difficult  to 
select  a  simple  theory  which  has  done  so  much  to  retard 
thought  as  this.  My  reasons  for  this  statement  are  four: 
First,  it  is  not  a  theory  at  all,  for  a  theory  is  an  explanation 
of  a  fact.  It  is  a  mere  assertion  that  wages  are  paid  out 
of  accumulated  funds,  but  so  is  interest,  and  rent,  and  the 
price  of  bread,  cigars,  and  every  other  thing  for  which  we 
pay.  The  reason  we  pay  for  a  thing  is  not  because  we 
have  money,  but  because  of  the  services  it  will  render. 


The  Principles  of  Wages  455 

Second,  this  superficial  notion  took  the  form  of  a  truism; 
it  glossed  over  and  hid  from  view  the  real  wage  problem, 
thus  removing  it  from  discussion.  Third,  its  effect  was  to 
favor  capital  and  do  gross  injustice  to  labor.  In  case  a 
group  of  laborers  wished  to  strike  or  otherwise  act  to 
improve  their  income  the  capitalist,  with  the  address  of 
a  moralist,  and  with  the  sanction  of  the  economists,  would 
object  on  the  ground  that  the  fund  is  fixed;  therefore,  if 
some  get  more  others  must  get  less.  This  doctrine  made 
laborers  dependent  upon  capitalists,  and  made  capitalists 
the  benefactors  of  the  race.  If  laborers  asked  more,  they 
were  met  with  the  admonition  to  sacrifice  instead,  for  in 
this  way  only  could  the  fund  be  maintained  and  their  wages 
assured.  Fourth,  it  made  the  rate  of  wages  depend  upon 
a  fund  accumulated  from  the  past  rather  than  upon  that 
which  labor  produces. 

6.  The  Wage  Problem  is  Forward-Looking. — Men  pay 
present  wages  out  of  accumulated  capital,  to  be  sure,  but 
the  willingness  to  hire  labor  and  the  amount  paid  for  it 
depend  upon  the  anticipated  product  of  labor.  The  plow- 
man's labor  will  later  mature  into  a  crop,  the  builder's 
labor  into  a  house,  and  the  manufacturer's  labor  into  a 
finished  good.  The  present  wage  is  an  advance  price  out 
of  the  expected  future  product. 

We  shall  now  see  that  machinery  affects  wages  as  it 
affects  the  product  of  labor. 

7.  Effect  of  Machinery  upon  Wages. — The  effect  of 
machinery  as  the  effect  of  legislation,  say  the  minimum 
wage,  upon  wages  may  be  approached  from  two  points  of 
view;  from  the  view-point  of  labor  as  a  whole,  or  from  the 
view-point  of  particular  classes  of  labor.  Roughly  speak- 
ing, labor  may  be  divided  into  two  classes — those  who  are 


456  Introduction  to  Economics 

skilled,  who  use  their  brain  in  their  work,  and  those  who 
are  unskilled,  who  use  principally  brawn  in  their  work. 

It  goes  without  saying  that  the  man  of  brawn  cannot 
effectively  compete  with  the  "man  of  iron";  the  machine 
wins  in  the  contest  of  strength  and  speed.  But  only  the 
unskilled  go  down,  they  only  are  outworked  and  underbid 
by  the  machine.  The  skilled  and  thoughtful  workman,  on 
the  contrary,  rises  above  the  machine,  takes  advantage  of 
its  superior  strength,  and  converts  its  productive  capacity 
into  an  enlarged  wage. 

On  the  whole,  whatever  increases  the  productive  power 
of  labor  will  also  increase  the  wages  of  labor.  Wages,  I 
mean  real  wages,  will  be  increased  in  the  form  of  a  larger 
money  income,  as  well  as  in  the  lowering  of  prices. 

Assume  two  farms,  one  fertile  and  the  other  poor.  The 
most  expert  labor  can  exact  no  more  than  a  small  yield 
from  the  latter.  This  small  yield  would  certainly  not 
justify  the  proprietor  in  a  large  wage  expenditure  for 
labor.  Poor  farm,  poor  help,  and  poor  wage  is  the  rule. 
Contrast  with  this  the  fertile  farm  which  will  respond  to 
skilled  labor  with  a  bumper  crop.  Upon  such  land  the 
cheapest  help  is  the  dearest,  for  the  enhanced  yield  occa- 
sioned by  superior  labor  will  leave  for  the  proprietor  a 
larger  surplus  despite  the  higher  wage.  Whether  skilled 
or  unskilled,  the  proprietor  of  the  rich  soil  can  pay  more 
for  labor  for  no  other  reason  than  that  it  yields  more. 

As  soil  fertility  adds  to  the  productivity  and,  therefore, 
to  the  wages  of  labor,  so  also  will  machinery  add  to  the 
productivity  of  labor,  and  in  consequence  to  wages.  Other 
things  equal,  wages  are  high  in  a  rich  country  where  natural 
resources  abound;  add  machinery  to  this  favorable  en- 
vironment and  the  labor  of  man  becomes  at  once  both 
lighter  and  more  remunerative. 


The  Principles  of  Wages  457 

8.  Similarity  of  Wages  and  Rent.— The  distinguishing 
difference  between  rent  and  wages  is  this:  rent  pays  for 
the  temporary  uses  of  wealth;  wages  pay  for  the  temporary 
services  of  men.  The  agencies  differ,  but  the  prices  (wages 
and  rent)  paid  for  the  services  of  these  agencies  are  deter- 
mined in  virtually  the  same  way.  The  business  man  is 
actuated  by  precisely  the  same  motive  when  he  buys  the 
services  of  wealth  and  the  services  of  labor.  These  ser- 
vices are  alike  offered  in  the  market  for  sale;  they  are  alike 
priced  according  to  the  values  attributed  to  them,  and 
they  are  valued  alike  according  to  their  yield.  In  discus- 
sing the  rent  problem  we  found  rent  to  be  a  deduction 
from  the  principle  of  resistance.  Because  of  resistance 
the  output  of  the  rent  bearer  is  limited;  this  limitation  or 
scarcity  gives  rise  to  the  value  and  price  of  the  product. 
The  value  attributed  to  the  product  makes  us  willing  to 
pay  a  rent  for  the  use  of  it.  This  reasoning,  without 
modification,  applies  to  the  wages  paid  for  the  scarce  and 
valuable  services  of  men. 

9.  The  Same  Principles  for  Unlike  Agents. — All  know 
that  human  beings  differ  from  rent  bearers,  but  this  is  not 
to  say  that  their  services  differ  in  the  economic  sense. 
Muscular  power  differs  from  machine  power  or  from  the 
power  of  a  waterfall  only  in  degree,  but  the  man  thinks 
and  the  machine  does  not;  men  differ  from  other  produc- 
tive agents  in  a  thousand  ways.  But  differences  among 
productive  agencies  do  not  imply  that  their  products  are 
governed  by  different  economic  laws. 

Many  economists  have  blundered  at  this  point,  and 
so  serious  was  their  blunder  as  to  render  their  system  of 
thought  erroneous  from  one  end  to  the  other.  For  in- 
stance, land  is  unlike  the  agents  produced  by  labor  in  a 
number  of  respects.     Many  economists,  seeing  this  differ- 


458  Introduction  to  Economics 

ence,  jumped  to  the  conclusion  that  the  products  of  these  un- 
like agents  must  therefore  obey  different  economic  laws,  so 
they  went  to  work  to  patch  up  a  rent  theory  for  the  land 
agent,  and  an  interest  theory  for  artificial  agents.  Do 
different  economic  laws  apply  to  cotton  and  wool?  Cer- 
tainly not,  yet  there  is  little  resemblance  between  a  sheep 
and  land.  Similar,  also,  and  obeying  precisely  the  same 
economic  laws  are  the  products  of  the  ditch-digger  and  the 
steam-shovel,  yet  the  one  is  a  man  and  the  other  a  machine. 
Wages  and  rent  obey  the  same  economic  laws  despite  the 
differences  in  the  agents  producing  them. 

10.  How  Relative  Rents  Are  Determined. — While  study- 
ing rent  we  found  it  to  be  a  physical  law  that  the  short 
factor  limited  the  output,  and  that  if  long  factors  are 
increased  the  product  will  not  proportionately  increase. 
The  entrepreneur  seeks  to  add  to  his  short  factor  because 
it  is  most  productive.  The  important  conclusion  follows 
that  because  of  the  higher  productivity  of  the  short  factor 
a  higher  rent  is  paid  for  the  use  of  it.  In  other  words: 
Short  factors  and  high  rent,  long  factors  and  low  rent. 

ii.  How  Relative  Wages  Are  Determined. — This  rea- 
soning applies  with  equal  force  in  determining  the  wages 
of  labor.  A  sledge-hammer  cannot  pound  stone,  neither 
can  a  man;  it  takes  the  two  combined  in  order  that  each 
may  liberate  the  productive  powers  in  the  other.  A 
mighty  man  with  a  tack-hammer  would  make  a  puny 
showing  at  crushing  stone.  There  should  be  a  best  physi- 
cal adjustment  between  labor  and  other  agents.  The 
earnings  of  labor  vary  with  the  adjustment  of  factors, 
wages  being  high  or  low  as  the  adjustment  is  good  or  poor. 

Of  the  different  groups  of  laborers,  some  are  oversup- 
plied   and    some   are   undersupplied.      How   the   relative 


The  Principles  of  Wages  459 

supplies  of  labor  affect  the  relative  wages  of  labor  may  be 
shown  by  way  of  illustration.  Philip  D.  Armour,  the 
great  packer,  once  showed  a  Chicago  newspaperman  about 
his  office.  It  transpired  that  a  comparatively  young  man 
sitting  at  a  desk  in  the  corner  of  the  big  room  was  drawing 
a  salary  of  $18,000  a  year.  "But,  Mr.  Armour,"  said  the 
newspaperman,  "could  you  not  hire  nine  men  at  $2,000  a 
year  who  could  do  more  than  he  does?"  "No,"  said  the 
millionaire  packer,  "one  hundred  $2,000  men  could  not 
do  the  work  he  does."  Joseph  French  Johnson  relates 
this  incident  and  adds  "that  men  are  paid,  in  the  long 
run,  in  proportion  to  their  power  of  production.  The 
executive's  salary  seems  exorbitant  to  the  day-laborer, 
yet  the  pay  of  the  executive  and  of  the  laborer  is  deter- 
mined by  the  same  law — executive  ability  is  comparatively 
scarce,  muscle  is  abundant;  hence  the  one  is  dear  and  the 
other  cheap." 

12.  Thought  and  Execution. — It  has  been  observed  many 
times,  but  none  too  many,  that  some  men  act  before  they 
think,  while  others  think  before  they  act;  the  invariable 
conclusion  is  that  only  the  latter  are  worthy  of  their  hire. 
Production  is  but  the  wise  adjustment  of  things,  and  this 
means  a  thought  or  plan  executed.  The  most  ingenious 
plan  is  in  itself  of  no  avail,  for  it  is  productive  only  as  it  is 
executed.  If  it  be  idle  no  purpose  is  served,  if  it  take  a 
wrong  course  it  works  destruction,  if  it  goes  aright  it 
effects  production.  The  direction  of  productive  agencies 
is  in  obedience  to  a  plan,  frequently  ill  devised  perchance, 
none  the  less  a  plan.  The  productivity  of  an  agent  de- 
pends quite  as  much  upon  the  plan  directing  it  as  upon 
its  own  powers,  because  it  works  poor  or  well  and  to  pur- 
poses good  or  bad,  depending  upon  the  plan.     Much  de- 


4(>0  Introduction  to  Economics 

pends  upon  the  plan;  the  dynamite  works  good  in  con- 
structing a  road-bed,  evil  in  destroying  a  newspaper 
plant,  together  with  the  lives  of  men;  poison  works  well  in 
killing  rats  and  ill  in  killing  people;  there  is  a  world  of  dif- 
ference whether  a  razor  is  used  to  sever  a  man's  beard  or 
his  head. 

The  wise  direction  of  productive  agents  is  but  the 
carrying  through  of  a  good  plan  with  discretion.  Entre- 
preneurs capable  of  so  planning  as  to  turn  productive  force 
to  its  greatest  account,  and  managers  with  sufficient  wis- 
dom to  direct  forces  most  effectively  in  the  execution  of 
plans  are  regretfully  scarce,  and  are  the  most  valuable  of 
men  because  they  are  the  most  productive. 

13.  To  illustrate:  Let  us  get  at  this  thought  in  another 
way.  Assume  a  situation  in  which  raw  materials,  machinery, 
buildings,  and  other  resources,  both  natural  and  produced, 
exist  in  great  abundance,  but  in  a  state  of  poor  adjust- 
ment. Within  this  situation  there  is  an  army  of  unskilled 
laborers.  A  few  inefficient  managers,  among  whom  exist 
petty  jealousies,  causing  them  to  work  at  cross-purposes, 
direct  the  different  operations  of  production.  Long  hours 
and  persistent  toil  enable  all  concerned  to  eke  out  a  liv- 
ing. 

To  put  it  in  figures,  let  us  say  that  the  sum  total  of  all 
this  productive  power  yields  an  annual  output  of  $300,000. 
Assume  now  that  a  change  comes  over  the  chaotic  situa- 
tion, that  an  entrepreneur,  capable  of  the  most  ingenious 
and  far-seeing  plans — such  as  a  Carnegie  or  a  Henry  Ford 
— comes  into  control,  and  that  an  executor  of  plans  or 
director  with  the  rare  ability  of  a  Schwab  is  given  the 
post  of  manager  to  make  these  plans  effective  in  opera- 
tion.    As  if  by  magic  a  happy  change  overcomes  the  situ- 


The  Principles  of  Wages  401 

ation,  for  order  is  brought  out  of  chaos  in  obedience  to  the 
one  plan  devised  by  the  new  master. 

In  the  new  order  the  merits  of  men  are  quickly  discerned 
and  the  most  fit  are  shouldered  with  responsibility  and 
promoted  according  to  their  worth.  Weak  managers  are 
envious  of  the  capable  because  they  fear  them  and  will 
deny  any  promotion  that  may  give  talent  an  opportunity 
to  make  itself  known.  Not  only  are  the  men  assorted  and 
set  to  tasks  becoming  their  abilities,  but  also  the  machinery 
and  all  forms  of  industrial  equipment  are  readjusted  to 
facilitate  one  another  as  do  the  parts  of  a  powerful  engine. 
Antagonism  gives  way  to  co-operation,  waste  energy  to 
efficiency,  and  decentralization  to  unified  direction. 

In  addition  to  a  well-ordered  production  an  effectual 
agency  takes  over  the  distribution  of  the  products.  Pat- 
terns and  quantities  are  offered  upon  the  market  as  the 
seasons  warrant  and  the  caprices  of  the  purchasers  demand. 
Pushing  now  the  sale  of  this,  withholding  that,  determin- 
ing to  whom  sales  shall  be  made,  at  what  prices,  upon 
what  terms,  and  a  hundred  other  matters,  vital  to  the 
life  of  a  business,  are  under  expert  direction  and  control. 
The  costs  of  doing  business  go  down  and  incomes  go  up. 

Let  us  now  assume  that  the  income  mounts  from 
$300,000  to  $1,000,000.  The  entrepreneur  and  the  man- 
ager, what  are  they  worth  to  the  situation?  The  answer 
is:  $1,000,000 — $300,000,  or  $700,000.  In  a  competitive 
market  ability,  as  potatoes  or  anything  else,  commands  a 
price  in  keeping  with  its  value,  hence  the  high  price  for 
talented  labor  and  the  low  price  for  common  labor. 

14.  The  Wage  System  in  Proportionality. — The  problem 
of  determining  wages  is  concerned  with  the  laborer's 
part  in  the  larger  problem  of  the  proportionality  of  all 


462  Introduction  to  Economics 

productive  factors.  Different  industries  bid  for  these  pro- 
ductive factors  in  the  competitive  market,  and  the  prices 
paid,  whether  wages  or  rent,  are  based  directly  upon  the 
worth  of  the  services  such  agencies  may  render.  Again 
the  rule  presents  itself:  short  factor  »-►  large  output  »->  high 
pay;  or  long  factor *»-*•  small  output »->■  low  pay. 

15.  The  Bargain  Theory. — Many  are  unaware  that  the 
productive  power  of  labor  is  the  determining  factor  in 
wages;  they  see  merely  the  surface  of  the  problem  and 
regard  human  service  only  in  the  aspect  of  a  thing  salable 
going  to  the  highest  bidder.  They  take  the  so-called  "bar- 
gain theory  of  wages"  at  full  face  value,  believing,  as  they 
do,  that  the  rate  of  wages  is  fixed  by  bargaining,  and  that 
every  game  of  deceit  or  violence  played  by  the  laborer  has 
the  effect  of  enhancing  his  wage.  No  one  denies  the  im- 
portance of  organized  bargaining  power  on  the  part  of 
labor.  Its  importance  is  that  the  unscrupulous  employer 
cannot  take  undue  advantage  of  labor  in  scaling  wages 
below  their  normal  competitive  rate.  There  is,  however, 
an  upper  limit  beyond  which  no  skill  at  bargaining  can 
raise  wages — that  is  the  productive  power  of  labor.  For 
one  who  produces  hats  the  price  of  his  product  is  fixed  in 
the  open  market;  he  has  different  costs  to  meet,  and  the 
prices  received  for  his  hats  less  his  costs  (for  machinery, 
rent,  and  raw  materials)  leaves  a  range  more  or  less  defi- 
nitely bounded  in  which  wages  are  fixed.  The  upper  limit 
of  this  range  is  the  upper  limit  of  the  bargaining  power 
of  labor. 

16.  The  wage  system  means  that  the  entrepreneurs, 
either  directly  or  indirectly  through  their  hired  managers, 
buy  the  labor  of  other  men  at  a  competitive  price.  So 
common  is  this  system  that  the  economic  organization  is 


The  Principles  of  Wages  463 

sometimes  called  "the  wage  system."  The  term  is  inapt, 
however,  because  it  falls  so  far  short  of  expressing  the 
whole  situation.  Agriculture  is  our  most  important  indus- 
try and  only  one-fourth  of  the  work  in  that  field  is  per- 
formed for  wages  outside  the  family.  So  also  professional 
men  as  well  as  the  proprietors  of  small  shops  in  the  busi- 
ness world  devote  themselves  to  their  own  undertakings. 

17.  Equal  Wages  for  Equal  Tasks. — Our  study  of  mar- 
ket prices  led  to  the  fact  that  there  cannot  be  different 
prices  for  the  same  commodity  in  the  same  market.  This 
truth  holds  true  respecting  the  wages  of  labor.  The  farmer 
must  pay  the  same  wage,  whether  his  hired  men  work  upon 
barren  soil  or  in  a  fertile  field. 

Jones  and  Smith  each  owns  a  livery-stable,  and  these  are 
located  on  opposite  corners.  The  equipment  of  Jones's 
stable  is  a  sorry  assortment,  and,  in  consequence,  his  trade 
is  small.  In  Smith's  stable  are  blooded  horses  and  the 
best  equipment  and,  in  consequence,  his  trade  proves 
highly  remunerative.  The  work  is  such,  assume  it,  that 
each  of  the  owners  must  employ  two  men.  It  goes  with- 
out saying  that  the  two  men  in  Smith's  employ  are  in  posi- 
tion to  produce  more  than  the  other  two.  Should  they 
strike  for  an  additional  dollar  a  day,  the  two  from  Jones's 
stable,  being  on  the  alert  to  improve  their  wage,  if  but 
slightly,  will  underbid  and  take  the  job.  It  is  the  compe- 
tition among  laborers  in  the  same  class  which  levels  their 
wages  to  a  uniform  rate. 

18.  Wages  Equal  the  Marginal  Product  of  Labor. — It  is 
the  productivity  of  that  portion  of  labor  which  is  employed 
under  the  most  unfavorable  circumstances  that  determines 
the  rate  of  wages  received  by  a  group  of  laborers. 

During  the  haying-season  farmers  take  full  advantage 


464  Introduction  to  Economics 

of  promising  weather.  Suppose  that  a  farmer  has  ten 
fields  of  grass,  varying  in  quality  from  the  most  fertile 
field  of  timothy  and  clover  to  the  poorest  field  of  rag-weeds, 
thistle,  and  dock.  The  hay  ripens,  and  upon  a  cloudless 
morning  the  farmer  is  early  afield,  with  such  help  as  is 
available,  and  mows  the  ten  fields.  All  goes  well  and  by 
the  following  afternoon  the  grass  under  the  hot  sunshine 
has  come  to  perfect  cure.  Now  storm  clouds  appear, 
threatening  to  ruin  the  crop  with  rain.  He  must  "make 
hay  while  the  sun  shines,"  or  lose  all.  Near  by  is  the  cross- 
roads store,  the  " loafer's  joy"  for  the  idle  men  of  the  com- 
munity. In  desperation  he  hastens  thither  for  help.  The 
ragamuffins  cease  their  idle  game  of  quoit  to  bargain  with 
the  farmer.     What  wage  will  be  paid  ? 

The  farmer  reasons,  let  us  say,  that  there  will  be  suffi- 
cient time  for  thirty  men,  an  average  of  three  to  a  field,  to 
save  the  hay.  But  unfortunately  he  finds  only  twenty- 
four  men  available — enough  to  save  only  eight  fields. 

Suppose  that  he  would  be  willing  to  pay  $100  to  have 
the  hay  in  field  number  one  saved,  and  $90  for  the  saving 
of  number  two,  $80  for  the  third,  and  in  order  $70,  $60, 
$50,  $40,  $30,  $20,  $10.  Rather  than  no  help  the  farmer 
would,  if  he  had  to,  pay  $100  for  the  services  of  the  first 
three,  but  he  is  anxious  to  pay  as  little  as  he  may.  Rather 
than  receive  no  pay,  any  three  of  the  laborers,  if  need  be, 
would  work  for  $10,  but  they  will  take  as  much  as  may  be 
had.  There  being  but  sufficient  labor  to  save  the  first 
eight  fields,  and  the  eighth  being  worth  $30,  it  follows  that 
the  farmer  could  not  pay  more  than  $30  for  the  marginal 
laborers.  It  was  shown  in  the  above  paragraph  that  equal 
pay  for  equal  tasks  governs  wages,  therefore  no  three 
laborers  can  receive  more  than  $30   or  $10  each.     The 


The  Principles  of  Wages  465 

laborers,  on  their  part,  can  force  the  employer  to  pay  them 
as  much  as  $10  each,  for  their  services  are  worth  that  sum. 
Applying  the  thought  in  this  example  to  the  whole  field 
of  labor  or  to  any  non-competing  group,  we  shall  find  that 
there  is  more  work  to  be  done  than  there  are  workers  to 
do  it.  Labor  everywhere  has  scarcity  and  utility  and  can, 
therefore,  command  a  wage.  The  wage,  under  competi- 
tive conditions,  will  be  determined  by  the  marginal  pro- 
ductivity of  labor. 

19.  The  Time  Element. — In  most  cases  the  product  of 
labor  does  not  mature  at  the  time  when  the  labor  is  ex- 
pended and  the  wage  paid.  If  the  marginal  product  of 
labor  will  be  worth  $10  when  it  matures,  say  a  year  after 
the  labor  is  expended,  the  present  wage  could  be  no  more 
than  the  present  worth  of  the  product.  The  customary 
economic  formula  reads:  Wages  are  determined  by  the  dis- 
counted marginal  product  of  labor. 

20.  Exercises. — r.  Is  there  any  difference  between  a 
wage  and  a  rent,  except  that  one  is  paid  for  the  produc- 
tive services  of  men  and  the  other  is  paid  for  the  services 
of  productive  agents  other  then  men? 

2.  Would  a  superior  workman  prefer  to  dig  coal  under 
a  time  or  piece  wage?  Should  a  manufacturer  of  shoes 
decide  to  change  from  a  time  to  a  piece  wage,  what  would 
be  used  as  a  guide  for  setting  the  new  piece  wage  ?  After 
this  change,  assume  that  the  workmen  increase  the  output, 
will  the  average  employer  increase  the  piece  wage  to  fur- 
ther stimulate  the  output?  Do  unions  favor  the  time  or 
the  piece  wage  ?     Why  ? 

3.  Is  the  time  or  piece  wage  best  adapted  for  the  follow- 
ing kinds  of  laborers:  Farm-hands,  stone-cutters,  office 
boys,  hat-factory  hands,  barbers,  paper-hangers,  railroad- 
brakemen  ? 


466  Introduction  to  Economics 

4.  "I  pay  my  men  a  piece  wage,  so  the  loss  is  theirs — 
not  mine — if  their  output  is  little."  Criticise  this  state- 
ment, which  was  made  by  a  prominent  employer. 

5.  Distinguish  between  wages  and  profits. 

6.  To  be  sure,  the  wage-fund  theory  is  unsound,  but 
what  of  it  ?  It  is  inoffensive  and  harmless.  The  harangue 
against  it  is  of  no  more  than  mere  academic  interest. 
Prove  this  to  be  false.  Prove  that  the  effect  of  machinery 
is  in  the  long  run  and  in  most  cases  to  increase  wages. 

7.  Why  does  skilled  labor  command  higher  wages  than 
unskilled  labor?  Assume  a  condition  under  which  the 
unskilled  would  get  the  higher  wage. 

8.  Why  is  there  equal  pay  for  equal  tasks  under  free 
competition  ? 

9.  Who  is  the  marginal  laborer? 

10.  Under  the  conditions  set  forth  in  paragraph  18  could 
the  wage  of  a  laborer  be  other  than  $10. 

n.  Prepare  a  written  argument  in  proof  of  the  last  state- 
ment in  this  chapter;  namely,  "wages  are  determined  by 
the  discounted  marginal  product  of  labor." 

12.  A  corporation  has  decided  to  vary  its  wage  pay- 
ments from  week  to  week  to  conform  with  the  variations 
of  a  set  of  index  numbers;  if  the  index  numbers  show  the 
purchasing  power  of  money  to  go  up  wages  will  be  corre- 
spondingly cut,  and  vice  versa.  Would  you  predict  any 
labor  troubles  for  this  company  during  a  period  of  rising 
prices?  during  a  period  of  declining  prices? 


CHAPTER  XXI 
CAPITAL 

i.  Introduction.  2.  Marginal  desirability.  3.  The  labor-cost  theory  of 
value.  4.  Criticisms.  5.  Productive  agents  classified.  6.  Interest  as 
wages  of  past  labor.  7.  Rent  in  the  labor-cost  theory.  8.  Bases  of  criti- 
cism. 9.  Only  valuable  land  is  cultivated.  10.  A  productive  agent  as  a 
composite  of  different  single  factors.  11.  Any  factor  which  is  an  integral 
part  of  a  productive  agent  is  valuable.  12.  Valueless  land  and  valueless 
composite  agent.  13.  Marginal  land.  14.  Other  arguments.  15.  Land 
as  capital.  16.  Capital.  17.  Capital  contrasted  with  wealth.  18.  Ac- 
quisitive powers  which  are  not  wealth.  19.  Extension  of  the  capital  con- 
cept.    20.  Capital  a  right  to  income.     21.  Exercises. 

i.  Introduction. — With  the  passing  of  time  the  economy 
of  self-sufficiency  is  being  more  completely  displaced  by 
the  division  of  labor  and  the  extensive  use  of  machinery. 
The  newer  economy  is  one  of  interdependence  or  an  econ- 
omy of  exchange  requiring  evaluations  in  terms  of  money 
and  trading  by  means  of  money.  The  definitions  of  capital 
are  so  numerous  as  to  confuse  and  bewilder  the  reader, 
but  the  tendency  is  to  regard  capital  as  the  present  money 
worth  of  a  person's  right  to  valuable  income.  Upon  one 
point  there  is  agreement,  namely,  that  interest  is  a  per 
cent,  and  that  it  is  the  payment  for  capital.  Interest  is  a 
per  cent  of  what?  You  cannot  speak  of  so  much  shelter 
as  a  certain  per  cent  of  a  house,  nor  of  a  quart  of  milk  as 
a  fixed  per  cent  of  a  cow.  Before  you  may  say  that  a  cer- 
tain return  is  five  per  cent  of  an  agent,  you  must  evaluate 
and  reduce  to  their  money  equivalents  both  the  return  and 

467 


468  Introduction  to  Economics 

the  agent.  Interest  is  a  per  cent  of  a  value-sum  which  is 
expressed  in  terms  of  money. 

Capital,  then,  is  a  value-sum  expressed  in  terms  of 
money.  Capital  looks  to  the  future  and  not  to  the  past; 
the  capital  value  embodied  in  a  machine  is  not  determined 
by  what  the  machine  cost  nor  by  what  its  output  has  been, 
but  by  the  expected  future  returns  from  it. 

Suppose  that  you  ask  a  manufacturer  why  his  product 
sells  high.  Would  you  be  satisfied  should  he  reply  that  it 
sells  high  because  of  high-priced  labor,  high-priced  raw 
materials,  high  rents,  and  so  on?  This  type  of  reply  is 
well  known  to  business  men,  and  to  their  customers  who 
encounter  it  so  frequently.  It  is  no  explanation,  however; 
it  avoids  explanation  by  shifting  from  the  price  of  one 
thing  back  to  that  of  another.  The  price  of  a  good  or  the 
capital  value  of  an  agent  is  not  explained  by  an  appeal  to 
the  past  nor  by  a  shift  to  the  price  of  something  else. 

Other  considerations:  Whether  controlled  by  a  monop- 
oly or  owned  by  competitors,  whether  produced  by  nature 
or  by  the  labor  of  men,  whether  material  as  land  or  imma- 
terial as  a  franchise — these  are  matters  of  no  consequence 
in  the  definition  of  capital.  Capital  is  a  value  concept, 
and,  to  give  the  following  discussion  a  proper  setting,  I 
shall  restate  a  portion  of  the  reasoning  on  value. 

2.  Marginal  Desirability. — We  have  seen  that  the  rela- 
tive values  attributed  to  goods  depend  upon  their  relative 
marginal  desirabilities.  Desirability  connotes  the  fitness 
of  a  good  to  gratify  a  desire,  be  that  desire  reasonable, 
ridiculous,  or  reprobatory.  Take  bread,  for  example,  and 
the  question  of  its  desirability  must  refer  to  a  particular 
unit  of  it  relative  to  the  desire  of  some  individual.  The 
desirability  of  bread  in  general  is  immeasurable,  and  the 


Capital  469 

idea  is  absurd  because  it  serves  no  practical  purpose.  All 
ambiguities  are  banished  when  the  thought  is  limited  to 
the  individual  desirer  and  to  a  unit  of  the  supply. 

What  is  the  desirability  of  shirts  in  general?  No  man 
knows  or  has  need  to  care.  J.  F.  Johnson  asks,  what  is 
the  desirability  of  a  shirt  to  the  poor  man  who  has  only 
one,  and  must  lie  in  bed  while  his  wife  carefully  launders 
it  for  him?  This  question  puts  the  problem  aright:  it 
shows  desirability  to  be  a  personal  or  individual  matter; 
it  enables  us  to  express  desirability  which,  in  the  case 
assumed,  would  be  equal  to  the  discomfort  he  would  suffer 
should  the  wife  ruin  the  precious  garment  upon  the  iron- 
ing-board. Assume  now  that  this  poor  man  is  prospered 
through  the  death  of  his  rich  uncle,  that  he  inherits  thirty 
shirts,  all  of  grade  A  and  alike  in  every  particular.  What 
now  is  the  desirability  of  a  shirt?  Upon  the  assumption 
that  no  one  would  care  to  buy  one  of  these  second-hand 
shirts,  he  would  be  little  perturbed  should  a  mishap  upon 
the  ironing-board  ruin  one.  In  other  words,  the  shirts 
being  the  same  in  quality,  we  may  say  that  his  marginal 
desirability  of  shirts  is  negligible. 

Marginal  desirability  as  an  explanation  of  value  is  insep- 
arable from  scarcity.  The  desirability  of  a  unit  depends 
upon  the  intensity  of  the  individual's  desire  for  it,  and 
this  intensity  itself  depends  upon  the  number  of  units 
already  possessed,  for  it  is  a  law  of  physiology  as  well  as 
of  psychology  that  desires  grow  less  as  the  amount  pos- 
sessed increases  until  satiety  is  reached.  This  (satiety)  is 
the  point  zero  where  desirability  ends  and  there  is  no 
value.  The  economic  importance  imputed  to  things 
(value)  is  based  upon  desirability,  and  desirability  upon 
desire,  and  desire  upon  the  limitation  of  supply. 


470  Introduction  to  Economics 

The  fitness  of  a  good  to  minister  to  well-being  is  in  itself 
no  explanation  of  value,  for  if  so,  air  and  water  would  be 
our  most  valuable  possessions.  Nor  will  scarcity  alone 
explain  value,  for  if  so,  fortune  would  attend  the  catching 
of  house-flies  in  the  winter-time.  Desirability  combines 
these  two  qualities. 

Heretofore,  we  have  studied  the  forces  which  limit  sup- 
plies of  goods,  likewise  analysis  has  been  made  of  the  laws 
of  demand.  These  are  the  ultimate  forces  back  of  the 
marginal  desirabilities  of  goods.  The  principle  of  relative 
marginal  desirabilities,  as  we  have  seen,  has  left  in  ruins 
the  doctrine  that  when  a  trade  is  made  one  party  gets 
cheated;  it  furnishes  us  the  basis  for  a  unified  theory  of 
value. 

3.  The  Labor-Cost  Theory  of  Value. — Note  the  contrast 
between  the  modern  view,  just  expressed,  and  the  old 
labor-cost  theory  of  value.  This  latter  theory  erroneously 
teaches  that  the  price  or  value1  of  a  good  is  proportional  to 
the  amount  of  labor  applied  in  its  production  or  to  the 
wages  paid  for  that  labor.  If  article  A  cost  one  day's 
labor  and  article  B  cost  two  days'  labor,  then,  according 
to  the  old  idea,  the  value  of  B  is  twice  that  of  A.  Value: 
value  ::  labor  cost  :  labor  cost.  Were  this  theory  sound, 
that  is,  if  the  relative  values  of  articles  are  proportional 
to  labor  costs  or  wage  outlays,  it  is  a  mere  truism  that  only 
labor  costs  can  enter  into  value.  If  you  account  for  the 
price  of  wheat  by  the  labor  cost  of  producing  it,  you  are 
forced  to  prove  that  other  outlays,  as  rents,  are  in  reality 


1  Value  in  the  labor-cost  theory  meant  the  exchange  power  of  a  thing.  In 
this  book  value  is  defined  as  the  importance  which  an  individual  attributes 
to  a  good  or  service,  be  that  good  or  service  salable  or  not.  Price  in  the 
broad  sense  covers  the  idea  of  exchange  value. 


Capital  471 

not  costs  at  all.  So  much  for  the  theory  which  teaches 
that  value  is  proportional  to  labor  cost  or  to  the  wages  paid 
for  that  labor. 

4.  Criticisms. — Certain  embarrassing  questions  confront 
the  advocates  of  this  hackneyed  theory:  (1)  One  finds  a 
precious  stone  worth  $500;  is  its  value  determined  by  its 
labor  cost?  No,  for  it  has  no  such  cost.  (2)  A  monopoly 
artificially  raises  the  price  of  a  good;  how  is  labor  cost 
responsible  for  the  rise?  The  answer  is,  in  no  sense.  (3) 
Does  the  value  of  money  depend  upon  its  labor  cost? 
Even  the  labor-cost  theorists  answer  in  the  negative.  (4) 
Wine  grows  better  and  sells  for  a  higher  price  when  allowed 
to  age  for  a  number  of  years.  A  sprout  worth  fifty  cents 
grows  through  time  into  a  tree  worth  a  hundred  dollars. 
What  has  labor  cost  to  do  with  the  increase  of  prices  caused 
by  growth  or  improvement  through  time?  Labor-cost 
advocates  regard  these  as  mere  exceptions  to  what  they 
call  the  "true  theory."  (5)  How  account  for  the  value  of 
labor  itself?  Another  exception.  (6)  And  does  labor  cost 
determine  the  value  of  land,  minerals,  and  other  natural 
products?  Again,  no.  Is  it  not  surprising  that  thought- 
ful men  should  teach  a  doctrine  so  monstrous  ? 

5.  Productive  Agents  Classified. — The  entrepreneur 
knows  that  wages  do  not  form  his  only  cost  of  doing  busi- 
ness. He  must  pay  for  materials  and  pay  numerous  hires, 
rents,  and  fees.  He  asks,  if  cost  determines  price,  why 
include  only  wage  costs  and  omit  others  of  equal  impor- 
tance? In  reply,  the  labor-cost  doctrinaire  is  forced  to 
make  this  artificial  classification  of  productive  agents: 

{a)  Land — so  defined  as  to  include  all  natural  agents. 
(b)  Capital — so  defined  as  to  include  all  artificial  agents 
created  by  labor. 


472  Introduction  to  Economics 

(c)   Labor — human  effort,  be  it  mental  or  physical. 

6.  Interest  as  Wages  of  Past  Labor. — According  to  the 
above  classification,  which  is  based  upon  the  labor-cost 
theory,  capital  consists  of  productive  goods  made  by 
human  labor.  In  other  words,  "capital  is  canned  labor" 
— past  labor  having  taken  the  form  of  present  goods. 
Then,  interest  or  payment  for  capital  is  payment  for  past 
labor.     Both  wages  and  interest  are  thus  labor  costs. 

To  this  point  capital  has  been  made  to  consist  of  pro- 
ductive goods — of  tools,  instruments,  machines,  and  so 
forth,  created  by  labor  and  used  to  produce  more  wealth. 
"We  have  been  told,"  says  F.  A.  Fetter,  "at  one  moment 
that  rent  was  not  measured  by  labor  or  due  to  it,  but  was 
a  surplus  gained  without  labor,  and  in  the  next  we  have 
seen  the  wealth  that  was  paid  over  to  the  landlord  as  rent 
used  by  him  as  capital  and  defined  as  the  product  of 
labor."1 

Just  here  trouble  arises  for  the  untenable  theory,  requir- 
ing a  shift  in  thought.  It  is  necessary  to  the  argument  to 
prove  that  the  returns  on  capital  are  uniform,  and  that 
no  surplus  arises  from  it.  To  prove  that  the  per  cent  of 
return  is  uniform  for  all  capital,  they  must  quit  the  idea 
of  capital  as  tools  and  shift  to  the  idea  of  capital  as  value. 
We  have  seen  that  competition  tends  to  maintain  uniform- 
ity of  returns  on  capital;  if  10  per  cent  is  returned  in 
the  shoe  business,  and  only  5  per  cent  in  the  hat  business, 
capital  will  be  shifted  from  the  less  to  the  more  remunera- 
tive employment.  Because  capital  is  paid  a  uniform  com- 
petitive return,  it  earns  no  surplus.  No  surplus  going  to 
capital,  the  labor-cost  theorists  tell  us  that  all  the  interest 
on  capital  is  a  true  labor  cost. 

1  Proceedings  of  American  Economic  Association,  December,  1900,  p.  240. 


Capital  473 

7.  Rent  in  the  Labor-Cost  Theory. — The  entrepreneur 
spends  money  for  labor,  for  agents  created  by  labor,  and 
for  natural  agents.  But  the  theory  tells  us  that  cost  de- 
termines value,  and  that  the  only  cost  is  labor  cost,  there- 
fore the  money  paid  for  the  use  of  natural  agents  must  be 
eliminated  from  cost.  Call  interest  the  wages  of  past 
labor,  and  wages  the  payment  for  present  labor,  but  the 
payment  for  the  use  of  natural  agents  cannot  be  called 
wages  since  labor  did  not  create  such  agents.  The  labor- 
cost  theorist  defined  rent  as  the  payment  for  the  use  of 
land.  He  believed  rent  to  be  no  part  of  cost,  thought 
that  it  was  a  surplus  over  and  above  cost.  If  rent  is  not 
an  element  of  cost,  he  tells  us  that  it  can  have  no  bearing 
on  value.  How  they  attempt  to  demonstrate  the  propo- 
sition that  rent  is  not  a  cost  will  now  be  shown. 

If  the  different  bushels  of  a  supply  of  wheat  are  of  uni- 
form grade,  they  will  sell  for  a  uniform  price  in  the  market. 
Like  bushels  of  wheat  in  a  market  at  a  given  time  will 
sell  at  the  same  price.  But  the  cost  of  producing  the  dif- 
ferent bushels  is  not  the  same.  Some  may  be  produced 
on  superior  soil  and  near  the  markets;  some  may  be  grown 
on  inferior  soil  and  distant  from  the  market.  Costs  vary, 
but  the  price  is  uniform.  Which  cost  is  it  that  determines 
the  price  ?  The  greatest  cost — that  portion  of  the  supply 
which  is  produced  at  the  greatest  cost  determines  the  price 
of  every  portion  of  the  supply.  But  the  greatest  cost  is 
upon  the  marginal  land — the  land  barely  worth  cultivat- 
ing. Such  land  is  so  inferior  that  no  rent  is  paid  for  the 
use  of  it.  Then  if  production  at  the  greatest  cost  deter- 
mines price,  and  if  this  greatest  cost  takes  place  where  no 
rent  is  paid,  it  must  follow  that  rent  does  not  enter  into 
the  cost  that  determines  value.     This  thought  was  cogently 


474  Introduction  to  Economics 

expressed  by  Ricardo:  "Corn  is  not  high  because  a  rent  is 
paid,  but  a  rent  is  paid  because  corn  is  high." 

8.  Bases  of  Criticism. — The  labor-cost  theory  of  price, 
requiring,  as  it  does,  capital  to  be  defined  as  "stored-up 
labor,"  has  been  on  the  defensive  from  the  moment  it  was 
first  penned.  The  theory  of  land  rent,  the  artificial  dis- 
tinction between  land  and  capital,  and  the  false  theory  of 
distribution  based  upon  this  classification,  compose  the 
defense  works  of  the  labor-cost  theory.  The  opposing 
forces,  who  classify  land  as  capital,  attack  this  doctrine 
(a)  by  pointing  out  exceptions  to  it,  (b)  by  showing  that 
all  cultivated  land  pays  a  rent,  thus  making  rent  an  ele- 
ment of  cost,  (c)  by  showing  that  there  is  no  such  mar- 
ginal land  as  the  theory  assumes,  (d)  by  showing  that 
valuation  as  a  price  appraisal  is  affected  by  cost  only  as 
cost  affects  supply,  and  finally,  (e)  by  ranking  land,  with 
all  other  privately  owned  sources  of  income,  as  capital. 

9.  Only  Valuable  Land  is  Cultivated. — Having  already 
noted  certain  exceptions  to  the  labor-cost  theory,  we  shall 
now  see  that  worthless  land  is  not  cultivated.  A  ton  of 
coal  from  a  worthless  mine  will  sell  for  the  same  price  as 
a  ton  of  like  quality  from  the  most  remunerative  mine. 
But  why  does  capital  refuse  to  operate  a  mine  where  the 
costs  of  digging  a  ton  are  equal  to  or  greater  than  the 
price  of  the  ton  when  marketed?  Any  schoolboy  can  .. 
give  the  answer;  capital  seeks  investment  only  where  there 
is  a  promise  of  profit.  The  scrap-heap  engine  is  valueless, 
except  for  junk,  not  because  it  could  yield  no  more  ser- 
vices, but  because  the  cost  of  getting  such  services  equals 
or  outweighs  their  worth.  Likewise,  land  is  not  cultivated 
when  the  cost  of  getting  services  from  it  is  equal  to  or  out- 
weighs the  worth  of  such  services.     Because  such  land 


Capital  475 

affords  no  net  yield,  it  is  of  no  value.     Only  valuable  land, 
land  that  renders  net  uses  above  cost,  is  cultivated. 

The  land,  tools,  seed  and  labor  jointly  produce  a  crop. 
In  our  economy  it  is  unthinkable  that  a  farmer  would  use 
valueless  tools,  valueless  seed,  and  valueless  land,  because 
the  result  would  be  a  valueless  crop.  There  is  no  more 
judgment  in  using  valueless  land  than  in  using  valueless 
seed  or  tools.  It  is  inconceivable  that  worthless  land 
could  produce  a  valuable  crop,  because  land  is  valuable 
by  virtue  of  its  valuable  yield. 

The  value  of  the  crop  reverts  value  to  the  agents,  each 
and  all,  which  produce  it.  It  would  appear  a  strange 
decision  should  the  swift  runner  accredit  all  his  speed  to 
the  right  leg,  denying  just  due  to  the  left;  and  not  less 
strange  should  we  accredit  all  the  lifting  to  two  when  it 
requires  the  combined  effort  of  three  men  to  raise  a  weight; 
and  not  less  strange  should  we  accredit  the  valuable  crop 
to  tools  and  men  when  it  requires  tools,  men,  and  land 
to  produce  it.  Proof  of  the  value  of  land  lies  in  the  valu- 
able product  of  which  it  is  an  essential  factor  of  produc- 
tion. Any  land  which  produces  a  valuable  income  must 
itself  be  valuable,  but  the  purpose  of  competitive  produc- 
tion is  a  valuable  yield,  therefore  none  other  than  valuable 
land  is  utilized.  But  the  tenant  cannot  have  valuable 
land  gratuitously;  he  must  pay  a  rent  for  the  use  of  it. 
We  now  see  that  only  valuable  land  is  cultivated,  and  that 
such  land  commands  a  rent,  consequently  rent  is  a  part 
of  the  cost  of  producing  agricultural  products.  Because 
land  rent  is  a  part  of  cost,  the  pure  labor-cost  theory  fails. 
10.  A  Productive  Agent  as  a  Composite  of  Different 
Single  Factors.— We  have  seen  that  a  single  agent  is  non- 
productive, and  is  valueless  unless  there  are  other  factors 


476  Introduction  to  Economics 

to  combine  with  it.  An  axe  cannot  cut  wood,  neither 
can  a  man;  it  takes  the  two  combined,  for  the  mutual 
interaction  of  agents  liberates  each  the  productive  power 
in  the  other.  Arid  land  produces  nothing,  and  is  valueless 
unless  water  is  in  prospect.  Turn  a  river  into  the  barren 
area  and  the  combination,  land  and  water,  becomes  pro- 
ductive and  valuable.  Since  neither  factor  alone  could 
produce  and  because  it  requires  mutual  contact  for  each 
factor  to  liberate  the  productive  capacity  in  the  other,  it 
follows  that  the  productive  agent  is  a  compound  agent 
made  up  by  uniting  a  number  of  single  factors.  Does  land 
make  the  water  valuable?  or  does  water  make  the  land 
valuable?  Each  liberates  the  productive  capacity  in  the 
other,  but  the  two  in  one  are  valued. 

ii.  Any  Factor  Which  Is  an  Integral  Part  of  a  Produc- 
tive Agent  is  Valuable. — Consider  a  rich  agricultural  State 
like  Minnesota,  with  its  many  lakes  and  rivers.  One  asks, 
is  not  the  water  there  which  is  used  in  production  a  free 
good?  The  water  in  the  lakes  or  rivers  is  free,  be- 
cause it  exists  in  such  abundance  as  to  render  the  short 
factor,  land,  incapable  of  liberating  its  productive  capacity. 
Suppose  now  it  were  possible  for  the  owner  of  a  bonanza 
farm  in  the  wheat  belt  of  Minnesota  to  sell  and  remove 
separately  the  moisture  from  his  farm.  The  water  would 
not  be  free,  but  it  would  in  fact  require  the  total  price  of 
the  farm  to  buy  it.  If  one  thinks  of  the  air  as  a  separate 
thing  it  is  free,  but,  integrated  with  the  chemical  qualities 
of  the  soil,  the  farmer  would  not  have  it  permanently 
removed,  were  this  possible,  for  a  price  less  than  that  of 
the  farm.  To  harness  a  free  agent  and  make  it  an  inte- 
grated part  of  a  composite  productive  agent  is  to  make  it, 
as  part  of  the  composite  agent,  valuable.     A  farm  is  more 


Capital  477 

than  land;  it  is  the  combined  productive  qualities  that 
grow  a  crop.  Man  wastes  no  effort  to  harness  an  agent 
which  is  without  promise  of  a  valuable  return.  The  con- 
clusion follows  that,  except  for  miscalculation  and  poor 
judgment,  all  cultivated  land  is  valuable  and,  therefore, 
commands  a  rent.  Let  us  give  this  thought  a  different 
statement. 

12.  Valueless  Land  and  Valueless  Composite  Agent. — 
The  writer  has  in  mind  an  investment  of  $100,000  made  by 
a  Louisiana  capitalist,  in  the  fruitless  attempt  to  convert 
a  seemingly  bottomless  swamp  into  productive  soil.  The 
venture  failed  and  the  money  was  lost  because  there  was 
no  productivity  in  the  situation  to  exploit.  A  composite 
agent  is  valueless  when  one  of  the  essential  factors  is 
unproductive. 

Suppose  that  this  swamp  had  responded  to  good  treat- 
ment, that  the  composite  agent  (the  land,  the  capital  ex- 
pended and  embodied  in  its  improvement,  together  with 
the  other  essential  factors)  had  produced  an  annual  net 
yield  of  $10,000.  This  capitalized  at  5  per  cent  would 
give  a  present  worth  of  $200,000.  This  yield  could  not 
be  subdivided,  and  the  different  portions  of  it  attributed 
to  the  different  factors  in  the  composite  agent.  But  why 
will  a  man  farm  except  for  a  yield?  And  if  yield  there 
be,  its  value  is  reflected,  without  exclusion,  to  the  factors 
which  compose  the  integrated  agent  of  production.  The 
process  of  capitalization  is  such  as  to  make  all  land  under 
cultivation  valuable  and  rent-bearing. 

13.  Marginal  Land. — Another  way  of  showing  that  rent 
is  a  part  of  the  cost  of  production  is  by  showing  that  there 
is  no  one  land  margin  for  all  purposes.  What  is  marginal 
land  ?     It  is  land  on  the  outer  edge  or  fringe  of  cultivation 


478  Introduction  to  Economics 

— beyond  the  margin  it  would  be  economically  unproduc- 
tive to  go.  Land  may  be  marginal  either  because  it  is 
physically  unproductive  or  because  it  is  distant  from  the 
market.  These  are  instances  of  the  extensive  margin. 
There  is  also  an  intensive  margin.  There  is  a  limit  beyond 
which  it  would  not  pay  to  make  further  expenditure  even 
upon  the  most  fertile  acre,  for,  although  more  uses  might 
be  yielded,  the  extra  cost  entailed  would  outweigh  the 
additional  income.  This  point  at  which  profits  cease  and 
loss  begins  is  the  intensive  margin.  The  margin  is,  in  pure 
theory,  a  boundary-line  separating  the  land  fit  (valuable) 
for  cultivation  from  the  unfit  (valueless).  It  is  comparable 
to  the  line  separating  time  into  past  and  future.  One's 
last  breath  is  now  in  the  past  and  his  next  breath  belongs 
to  the  future;  a  mere  line  separates  time  past  from  time 
future.  The  above  definitions  have  been  given  in  another 
connection,  but  it  is  well  to  refresh  the  memory  at  this 
point. 

Land  suitable  for  the  grazing  of  cattle  may  be  physically 
inferior,  and  far  distant  from  the  market.  The  same  can- 
not be  said  of  land  suitable  for  truck-farming.  To  express 
this  differently,  the  extensive  margin  for  truck-farming 
will  be  far  within  the  margin  for  grazing  purposes.  Like- 
wise marginal  land  for  factory  sites  will  usually  be  within 
the  margin  of  land  used  for  growing  cotton.  In  other 
words,  there  are  numerous  land  margins  corresponding  to 
the  numerous  uses  for  land. 

Assume  that  land  which  is  marginal  for  vegetable-gar- 
dening would  yield  $5  rent  per  acre  if  used  for  the  grow- 
ing of  wheat.  This  $5  must  be  paid  by  the  vegetable- 
gardener.  It  is  part  of  his  cost  of  production,  although 
he  is  working  land  which  is  marginal  for  his  purpose. 


Capital  479 

Now  that  land  rent  is  seen  to  be  a  part  of  cost,  the 
labor-cost  theory  of  value  will  cease  to  bother  us.  So  long 
as  this  theory  survived,  however,  the  labor-cost  theorists 
had  to  classify  land  (natural  agents)  as  distinct  from 
capital.  They  could  not  speak  of  land  as  capital  and  then 
term  interest  the  wages  of  past  labor. 

14.  Other  Arguments. — A  classification  of  any  conse- 
quence must  be  true  to  fact  and  serve  a  definite  purpose. 
We  have  seen  that  the  old  classification  failed  in  its  pur- 
pose as  a  proof  that  labor  is  the  only  cost  and  sole  source 
of  value.  I  shall  now  examine  the  truth  of  the  claims  that 
land  is  unlike  capital.1  These  claims  may  be  briefly  stated 
and  refuted.  First  claim:  Land  is  immovable;  capital 
movable. 

Portability  is  not  a  basis  for  distinguishing  capital  from 
land;  if  it  is,  an  office-building  must  be  reckoned  as  land. 
The  only  economic  relevancy  in  the  moving  of  things  is 
this — by  moving  a  thing  from  where  it  is  less  useful  to 
where  it  is  more  useful,  there  is  created  place  utility. 
Place  utility  is  created  by  making  things  more  accessible 
to  the  market.  It  is  common  knowledge  that  new  or 
improved  lines  of  transportation  make  land  more  accessi- 
ble to  the  market. 

Second  claim:  Land  is  a  gift  of  nature;  capital  is  a 
product  of  labor. 

Improved  land,  as  any  finished  good,  is  a  joint  product 
of  man  and  nature.  The  question  of  origins  is  of  interest 
for  some  purposes,  but  not  for  economic  purposes. 

Third  claim:  The  supply  of  land  is  fixed;  capital  is 
increasable. 

1  Davenport's  Economics  of  Enterprise,  chap.  XI,  deserves  careful  study 
on  this  point. 


480  Introduction  to  Economics 

Land  as  a  productive  agent  is  increased,  in  the  economic 
sense,  by  whatever  increases  its  productivity.  The  exten- 
sion of  transportation,  the  draining  of  swamps,  irrigation, 
new  methods  of  cultivation,  extensive  and  intensive  utiliza- 
tion— any  means  of  getting  more  from  land  increases  land 
as  an  economic  factor.  When  one  thinks  of  land  as  a 
fixed  number  of  square  miles,  he  is  thinking  in  terms  of 
geography — not  economics.  The  economist  measures  pro- 
ductive agents  in  terms  of  their  capacity  or  output,  and 
not  in  terms  of  their  weight,  bulk,  or  area.  There  is 
much  difference  between  the  two  words  "supply"  and 
"amount." 

The  economists  who  make  the  above  classification  tell 
us  that  the  capacity  of  agents  is  measured  in  terms  of  the 
output  of  these  agents.  It  is  also  said  by  them  that  all 
capital  goods  come  from  the  land.  Then,  how  can  they 
say  that  a  fixed  capacity  (or  supply)  turns  out  an  ever- 
increasing  yield  ?  We  may  ultimately  reach  the  final  eco- 
nomic limit  to  the  supply  of  land  forces,  but  when  that  is 
reached  we  shall  also  have  reached  the  final  limit  to  the 
output  of  capital  goods. 

Fourth  claim:  Land  obeys  the  law  of  diminishing  returns; 
capital  does  not. 

This,  it  should  be  said,  is  not  now  generally  accepted 
by  economists.  Economists  now  know  that  should  any 
productive  agent  cease  to  obey  the  law  of  diminishing 
returns,  it  would  lose  the  element  of  scarcity  and  become 
a  free  good. 

Fifth  claim:  Land  yields  a  differential  surplus;  income 
from  capital  is  uniform. 

The  thought  is  that  the  products  of  labor  are  reproduci- 
ble.    If  a  house  costing  $10,000  yields  10  per  cent  on  the 


Capital  481 

investment,  others  will  build  houses  in  the  same  vicinity, 
and  will  continue  building  until  the  return  on  capital  is 
reduced  to  normal.  On  the  contrary,  it  is  stated  that  if 
one  invests  $10,000  in  a  tract  of  land,  a  new  line  of  trans- 
portation or  boom  in  building  may  increase  the  return  to 
a  large  surplus  above  normal.  Land  is,  according  to  the 
argument,  non-reproducible,  therefore  the  landlord  may 
enjoy  a  durable  surplus. 

But  should  the  income  be  increased  to  $1,000,  or  10  per 
cent  on  the  cost  price,  would  the  land  still  be  worth  only 
$10,000?  Not  so — its  capitalization  would  increase;  if 
the  interest  rate  be  5  per  cent,  the  capitalization  would  be 
doubled.  There  is  no  difference  between  the  percentual 
returns  on  land  and  other  durable  sources  of  income. 

Likewise,  if  one  tract  of  land  yields  more  than  another, 
the  difference  is  not  a  surplus  gain,  for  the  better  tract  will 
be  capitalized  higher  than  the  inferior  tract.  The  incomes 
on  the  two  tracts  will  tend  to  equality  of  percentual  in- 
comes. 

All  durable  agents  being  capitalized  on  the  basis  of 
anticipated  yield,  it  follows  that  the  present  capital  value 
of  land  or  other  agents  is  such  as  to  allow  no  surplus  except 
in  case  of  a  miscalculation. 

15.  Land  as  Capital. — Whenever  a  thing  is  valuable, 
there  is  a  reason  for  attributing  value  to  it;  land  as  a 
productive  factor  is  valuable  for  the  same  reason  that  other 
factors  are  valuable,  namely,  the  command  it  gives  the 
owner  over  prospective  incomes.  The  estimated  worth  of 
its  future  incomes  discounted  to  their  present  worth  gives 
the  capital  value  of  land.  Capital  is  one's  control  over 
incomes  expressed  in  terms  of  money.  The  possession  of 
land  puts  one  in  control  of  valuable  incomes.     Land  ex- 


482  Introduction  to  Economics 

pressed  in  terms  of  money  is  capital  and  it  obeys  all  the 
laws  of  capital. 

16.  Capital. — Interest  is  a  payment  for  the  use  of  capi- 
tal, and  it  pays  for  nothing  else.  Where  interest  is  there 
must  be  a  capital  sum.  But  interest  is  always  expressed 
as  a  per  cent.  A  per  cent  of  what?  Of  a  certain  sum  ex- 
pressed in  terms  of  money.  One  cannot  say  that  $100  is 
5  per  cent  of  a  motor-truck,  but  if  the  motor-truck  be 
capitalized  or  priced  at  $2,000,  then  $100  becomes  5  per 
cent  of  the  capital  sum.  The  return  on  a  capitalized  sum 
takes  the  form  of  interest. 

The  word  capital  is  derived  from  the  Latin  caput,  a  head, 
a  source.  The  classical  Latin  at  times  used  the  word  caput 
for  a  sum  of  money  put  out  to  interest.  We  continue  to 
speak  of  the  principal  of  a  money  loan  as  capital.  Bor- 
rowers in  turn  regarded  capital  as  funds  to  invest.  The 
idea  was  extended  to  include  estimates  in  terms  of  capital, 
not  only  the  sums  borrowed  and  lent,  but  also  the  money 
worth  of  one's  rights  in  goods. 

17.  Capital  Contrasted  with  Wealth. — During  the  season 
of  19 18  three  gentlemen  jointly  produced  5,000  bushels  of 
potatoes  in  Monmouth  County,  New  Jersey.  At  the  end 
of  the  season  potatoes  were  selling  at  $1.50  a  bushel,  mak- 
ing their  total  output  worth  $7,500.  The  potatoes  as  such 
were  wealth,  and  $7,500  the  price  of  that  wealth.  Each  of 
the  three  producers  had  thus  a  capital  of  $2,500.  Had  the 
price  been  50  cents  a  bushel,  the  sum  of  wealth  would  still 
have  been  5,000  bushels,  but  the  capital  of  each  would 
have  been  only  $833.33.  Had  the  price  been  $5  a  bushel, 
due  to  scarcity  of  potatoes  throughout  the  country,  the  sum 
of  wealth  controlled  by  these  men  would  still  be  5,000  bush- 
els, but  each  would  have  a  capital  of  $8,333.33.     Wealth 


Capital  483 

and  capital  sometimes  move  in  opposite  directions — de- 
creasing wealth  may  mean  increasing  capital,  and  vice  versa. 

These  men  sold  the  crop  to  a  merchant  in  London  for 
$7,500,  allowing  him  ninety  days'  time  for  payment.  The 
merchant  was  in  this  country  at  the  time,  and  tendered 
his  note  for  the  amount,  payable  at  a  New  York  bank. 
In  transit  the  potatoes  were  sunk.  The  wealth  thing  (the 
potatoes)  ceased  to  exist  and  with  it  the  capital  of  the  pur- 
chaser, but  the  capital  of  the  sellers  was  not  affected.  The 
capital  ($2,500)  of  each  of  these  men  ceased  to  be  the  money 
worth  of  his  control  over  the  wealth  and  became  a  claim 
against  an  individual. 

18.  Acquisitive  Powers  Which  Are  Not  Wealth. — There 
is  much  capital  which  is  not  wealth  at  all. 

Good-will:  The  words  "Gold  Dust"  symbolize  the  good- 
will enjoyed  by  the  Fairbanks  Company  for  their  washing 
powder  of  that  name.  A  trade-mark  is  never  more  than 
a  symbol  for  good-will,  and  it  serves  two  purposes:  It  safe- 
guards good-will  as  a  source  of  profit,  and  enables  pur- 
chasers on  their  part  to  identify  the  goods  they  desire.' 
Good-will  is  established  for  a  good  when  purchasers  learn 
to  like  it  and  call  for  it  in  preference  to  other  similar  goods. 
So,  also,  is  good-will  established  for  a  firm  when,  through 
tactful,  prompt,  and  honest  dealings  a  collective  friendli- 
ness is  created  which  insures  future  patronage.  Good-will 
is  valuable  because,  representing,  as  it  does,  both  trade- 
getting  and  trade-holding,  it  is  a  cause  of  income.  It  is 
the  largest  asset  of  many  a  successful  business  man.  But 
good-will  does  not  take  the  form  of  lands,  buildings,  rolling- 
stock,  clothing,  food,  or  any  other  wealth — it  is  not  wealth 
at  all.  It  brings  no  more  goods  into  society;  it  merely  en- 
bles  individuals  to  acquire  more  income  from  others.    Good- 


484  Introduction  to  Economics 

will  is  acquisitive,  not  productive  in  nature.  As  a  source 
of  valuable  private  income,  however,  it  is  capital. 

Franchise:  When  a  city  votes  a  franchise  to  a  company 
to  operate  a  bus-line  or  street-railway,  it  creates  no  object 
of  wealth.  A  franchise  is  a  right  of  an  individual  or  com- 
pany to  enjoy  a  privilege  which  is  denied  to  others.  It  is 
capital  but  not  wealth,  nor  does  it,  as  such,  produce  wealth. 
All  we  can  say  is  that  it  is  a  private  acquisitive  source  of 
valuable  income.  It  is  capitalized,  as  is  durable  wealth, 
on  the  basis  of  its  income,  and  is  capital  in  the  true  sense 
of  that  word. 

Monopoly  rights,  and  other  sources  of  mere  acquisitive 
income,  cannot  be  termed  wealth.  We  should  be  counting 
twice  to  term  them  wealth.  But  as  sources  of  valuable 
private  income  they  must  be  classified  as  capital. 

19.  Extension  of  the  Capital  Concept. — During  the  Mid- 
dle Ages  land  was  not  an  object  of  purchase  and  sale;  it 
was  no  more  a  marketable  thing  than  are  public  highways 
or  city  parks  to-day.  The  different  forms  of  wealth  in 
cities  meanwhile  were  salable,  and  they  were  expressed,  as 
are  salable  goods  to-day,  in  terms  of  their  money  worth. 
Since  land  was  not  priced,  or  capitalized,  the  landlord 
could  not  speak  of  his  returns  as  interest,  for  interest  is  a 
per  cent  of  a  capital  sum.     His  returns  were  called  rentals. 

Due  largely  to  differences  in  salability,  town  property 
came  to  be  thought  of  in  terms  of  its  money  worth,  and 
was  called  capital,  but  there  was  no  occasion  for  attaching 
a  money  price  to  land,  and  it  was  thought  of  as  different 
from  capital. 

The  past  century  has  witnessed  a  vast  extension  of  cap- 
italistic enterprises,  every  form  of  natural  resource  has  be- 
come readily  salable  by  means  of  stocks  and  bonds.     All 


Capital  485 

wealth  has  become  liquid  and  the  money  economy  all-per- 
vasive. 

20.  Capital  a  Right  to  Income.— The  lender  thinks  of 
capital  as  the  principal  of  a  money  loan;  he  parts  with 
the  money,  however,  when  he  loans  it,  and  his  capital  is 
but  the  money  worth  of  the  right  he  holds  against  the 
borrower.  The  borrower  looks  upon  capital  as  money 
invested,  or  to  invest,  but  when  once  he  has  invested  it 
his  money  is  gone  and  his  capital  becomes  the  money 
worth  of  his  expected  incomes.  A  sale  on  credit  is  but 
another  form  of  lending.  The  seller's  capital  takes  the 
form  of  a  right,  bearing  interest,  against  the  purchaser. 
If  paid  at  the  time  of  sale  the  seller  is  in  command  of  a 
capital  fund  to  be  invested. 

Any  form  of  durable  wealth  is  such  because  of  the  in- 
come it  promises.  Wealth  ownership  is  but  a  right  to 
income.  If  its  value  is  expressed  in  money  this  wealth 
becomes  capital  and  the  returns  upon  it  are  interest. 

Unsalable  forms  of  wealth,  such  as  one's  clothing,  the 
food  on  his  table,  or  his  mother's  picture,  are  not  capital. 
Capital  is  always  forward-looking,  is  a  more  or  less  durable 
source  of  private  income.  It  may  represent  the  present 
money  worth  of  real  productive  agents,  or  of  predatory 
sources  of  income.  It  is  a  summation  of  value  rather  than 
of  welfare,  and  may  reflect  scarcity  rather  than  abundance. 
Capital  is  the  present  worth,  expressed  in  money,  of  a  per- 
son's right  to  secure  expected  valuable  incomes. 

The  next  chapter  will  deal  with  the  interest  problem  as 
an  outgrowth  of  the  capitalization  of  expected  incomes. 

21.  Exercises. — i.  Contrast  the  two  theories  of  value 
presented  at  the  beginning  of  this  chapter. 


486  Introduction  to  Economics 

2.  Can  you  think  of  two  exceptions  to  the  labor-cost 
theory  of  value  which  are  not  mentioned  in  the  fourth 
paragraph  of  this  chapter? 

3.  Why  was  it  necessary  to  classify  productive  agents 
as  land,  labor,  and  capital,  in  order  to  defend  the  labor- 
cost  theory  of  value? 

4.  By  what  reasoning  did  the  older  economists  make 
interest  on  capital  a  form  of  wages? 

5.  How  did  they  rule  rent  out  of  the  cost  of  produc- 
tion? 

6.  If  none  but  valuable  land  is  cultivated,  does  it  follow 
that  land  rent  is  a  cost  in  the  production  of  agricultural 
products?     Defend  your  answer. 

7.  It  is  argued  that  land  differs  from  capital  upon  the 
grounds  of  (1)  portability,  (2)  origin,  (3)  fixation  of  supply, 
(4)  diminishing  returns,  (5)  surplus  returns.  Criticise 
these  as  to  their  truth  or  error  and  as  to  their  economic 
relevancy. 

8.  Contrast  wealth  and  capital.  Mention  some  acquisi- 
tive sources  of  private  gain  which  are  capital  but  not 
wealth. 

9.  What  changes  have  brought  about  an  extension  of 
the  capital  concept  ?     Define  capital. 

10.  Criticise  the  following  quotations  from  Economic 
Studies,  by  Walter  Bagehot:  (a)  "When  new  capital  comes 
into  cotton-spinning,  this  means  not  only  that  new  money 
is  applied  to  paying  cotton  operatives,  but  also  that 
new  money  is  applied  to  buying  new  spinning-machines." 
(P.  48.) 

Formulate  a  definition  of  capital  from  the  use  made  of 
the  word  in  this  quotation. 

(b)  "Between  a  loaf  of  bread  and  a  steam-engine,  be- 
tween a  gimlet  and  a  piece  of  bacon,  there  looks  as  if  there 
were  really  nothing  in  common,  except  that  man  made 
both.  But,  though  the  contrast  of  externalities  is  so 
great,  the  two  have  a  most  essential  common  property, 
which  is  that  which  political  economy  fixes  upon;  the  pos- 
sible effect  of  both  to  augment  human  wealth.     Laborers 


Capital  487 

work  because  they  want  bread;  their  work  goes  farther  if 
they  have  good  tools,  and  therefore  economists  have  a 
common  word  for  both  tools  and  bread.  They  are  both 
capital  and  other  similar  things  are,  too."     (P.  50.) 

According  to  the  quotation  what  is  the  "essential  com- 
mon property"  of  capital  "which  political  economy  fixes 
upon?" 

Does  land  have  this  "common  property"? 

If  "both  tools  and  bread"  are  capital,  can  a  distinction 
be  made  between  capital  and  consumption  goods? 

From  the  thought  in  this  quotation  could  you  exclude 
good  health  from  a  definition  of  capital?  What  productive 
agents  could  you  exclude  ? 

(c)  "Thus,  for  the  present  discussion,  the  acquired  skill 
of  a  laborer  is  capital.  ...  It  is  a  productive  thing  made 
by  man,  as  much  as  any  tool;  it  is,  in  fact,  an  immaterial 
tool  which  the  laborer  uses  just  as  he  does  a  material  one. 
It  is  co-operative  capital  as  much  as  anything  can  be. 
And  then,  again,  the  most  unlikely-looking  and  luxurious 
articles  are  capital  if  they  reward  and  stimulate  labor. 
Artisans  like  the  best  of  rabbits,  the  best  bits  of  meat,  green 
peas,  and  gin;  they  work  to  get  these;  they  would  stay  idle 
if  they  were  not  incited  by  these,  and  therefore  these  are 
capital."     (P.  51.) 

If  "the  acquired  skill  of  a  laborer  is  capital,"  would 
his  other  productive  capacities  or  qualities — his  muscle, 
reasoning  faculties,  willingness  to  work — be  capital? 

If  capital  be  that  which  stimulates  labor,  is  one's  love 
for  his  wife  and  family  to  be  termed  capital  ? 

Would  this  quotation  make  wages — the  reward  for 
labor — capital  ? 

Would  you  judge  from  this  quotation  that  capital  is 
stimulus  to  work  ?  or  the  reward  for  working  ?  or  the  power 
to  work?  or  a  tool  with  which  to  work?  or  the  things,  as 
"green  peas  and  gin,"  which  work  would  create? 

(d)  Other  quotations:  "The  rest  is  left  in  money,  and 
this  we  call  the  saving,  the  new  capital."  (P.  171.)  "Cap- 
ital obtained  by  abstinence."     (P.   169.)     "You  can  say 


488  Introduction  to  Economics 

that  the  capitalist  must  be  in  possession — of  certain  arti- 
les  possessing  exchangeable  value."     (P.  185.) 

Are  the  words  saving  and  abstinence  synonyms? 

Judging  from  these  quotations,  what  things  are  to  be 
included  in  capital? 

(e)  A  good  definition  contains  one  and  only  one  funda- 
mental idea.  Can  you  formulate  a  good  definition  of 
capital  which  embodies  all  that  Bagehot  has  said? 

Would  such  a  definition  make  capital  tangible  or  intan- 
gible? productive  or  merely  acquisitive?  external  to  man 
or  a  quality  of  man  ?  In  so  far  as  money  fits  into  the  defi- 
nition would  it  be  money  invested?  or  money  saved?  or 
money  to  be  acquired  ? 


CHAPTER   XXII 
INTEREST 

i.  The  productivity  theory.  2.  The  interest  rate  unaffected  by  varia- 
tion in  production.  3.  Unproductive  loans.  4.  The  money  fallacy.  5. 
Variation  of  bank  interest.  6.  Gross  interest  and  net  interest.  7.  Time- 
discount.  8.  Illustration.  9.  Time-discount  in  capitalization.  10.  Capi- 
talization and  interest.  11.  Adjustment  of  interest  to  capitalization.  12. 
The  present  worth  of  a  bond.  13.  Money  loans  analogous  to  investments. 
14.  The  interest  rate  reflects  time-discount.  15.  Fallacy  of  inversion.  16. 
Interest  involved  in  simple  exchanges.  17.  Preference  for  present  posses- 
sion. 18.  Apparent  exceptions.  19.  The  consumption  idea.  20.  Reasons 
for  differences  in  time-discount  among  persons.     21.  Exercises. 

i.  The  Productivity  Theory. — Ask  the  common  man, 
"What  determines  the  rate  of  interest?"  He  will  consider 
this  a  simple  common-sense  question  and  give,  with  an 
air  of  confidence,  one  or  the  other  of  the  following  replies: 
"The  rate  of  the  productivity  of  capital  determines  inter- 
est," or  "The  rate  of  interest  is  determined  by  the  supply 
of  loanable  money  on  the  market."  These  replies,  how- 
ever, are  false;  they  represent  two  of  the  most  persistent 
fallacies  in  economics. 

One  observes  that  the  rate  of  return  on  different  types 
of  business  tends  to  be  about  the  same.  A  $50,000  store, 
or  mill,  or  farm,  or  mine  will  return  a  net  yield  of  $2,500. 
He  reasons  from  the  capital  value  of  the  agent  to  the  money 
worth  of  the  product,  and  concludes  that  the  rate  of  in- 
terest is  proportionate  to  the  productivity  of  capital. 

2.  The  Interest  Rate  Unaffected  by  Variation  in  Produc- 
tion.— Does  the  capital  value  of  a  farm  determine  the 
price  of  the  crop,  or  is  it  the  price  of  the  crop  that  deter- 
mines the  capital  value  of  the  farm  ?     Can  you  sell  your 

489 


490  Introduction  to  Economics 

crop  for  $i,coo  because  your  farm  is  worth  $20,000,  or  is 
your  farm  worth  $20,000  because  you  can  sell  the  annual 
crop  for  $1,000?  The  order  of  thought  must  be  the  reverse 
of  that  assumed  by  the  productivity  theorist.  The  farm 
produces  crops,  but  the  capital  value  of  the  farm  does  not 
determine  the  price  of  the  crop;  it  is  the  price  of  the  crop 
that  determines  the  capital  value  of  the  farm. 

Assume  now  that  because  of  the  discovery  of  a  new  proc- 
ess the  annual  crop  of  the  farm  is  increased  from  $2,500  to 
$5,000.  Does  it  follow  that  the  rate  of  interest  is  doubled, 
that  it  has  increased  from  5  to  10  per  cent  ?  The  answer  is, 
the  rate  of  interest  has  been  neither  increased  nor  diminished. 
The  capital  value  of  the  farm,  however,  has  been  doubled. 

It  is  the  capital  value  of  the  agent  and  not  the  rate  of 
interest  which  is  affected  by  a  change  in  the  productivity 
of  agents. 

3.  Unproductive  Loans. — Furthermore,  a  vast  amount 
of  capital  is  borrowed  at  interest  for  purposes  of  consump- 
tion. This  capital  produces  nothing  other  than  immediate 
gratification  for  the  consumer.  Should  we  assume  that 
all  entrepreneurs  owned  their  productive  agencies,  and 
that  no  capital  is  borrowed  for  productive  enterprise,  still 
we  should  find  that  much  capital  would  be  borrowed  at 
interest  for  pure  consumptive  purposes.  Here  the  bor- 
rower's motive  for  paying  interest  cannot  be  the  yield  of 
such  capital.  The  productivity  theory  fails  both  for  loans 
to  be  used  productively  and  to  be  used  for  the  immediate 
gratification  of  desires. 

4.  The  Money  Fallacy. — The  other  fallacy,  above  men- 
tioned, is  that  if  money  is  plentiful  interest  will  be  low, 
and  vice  versa.  Interest,  it  is  said,  is  but  the  price  of 
money.     As  the  price  of  potatoes  is  low  when  the  crop  is 


Interest  491 

abundant,  so  the  price  for  the  use  of  money  will  be  low 
when  it  is  plentiful.  The  faulty  notion  that  the  rate  of 
interest  is  lowered  by  a  large  issue  of  paper  notes  has  a 
strong  hold  on  the  public  mind. 

Why  do  men  borrow  money?  They  borrow  in  order 
that  they  may  purchase  goods — tools  of  production,  food, 
land,  clothing,  and  other.  The  farmer  borrows  money  with 
which  to  stock  his  farm.  The  mere  issue  of  money  will  not 
increase  goods.  Double  the  money  and  you  do  not  double 
the  construction  of  railways  and  machine-shops,  nor  do  you 
multiply  by  two  the  number  of  horses,  swine,  and  cattle. 

Goods  remain  the  same  while  the  money  doubles,  with 
the  result  that,  other  things  equal,  it  requires  two  dollars 
to  do  the  money-work  formerly  done  by  one.  Prices  dou- 
ble, and  the  borrower  must  demand  $200,  whereas  he 
would  have  borrowed  $100  before  the  increase  in  the 
quantity  of  money. 

Because  prices,  other  things  being  equal,  vary  with  the 
quantity  of  money,  the  demand  for  money  varies  with  the 
quantity  of  it.  Other  things  the  same,  the  demand  for 
money  will  double  when  the  quantity  of  it  is  doubled,  and 
vice  versa.  Interest  is  the  price  paid  for  a  money  loan, 
and,  like  any  other  price,  it  marks  the  point  of  equilibrium 
between  supply  and  demand. 

Professor  Irving  Fisher  says  that  "an  examination  of 
the  figures  for  per  capita  circulation  of  money  in  the 
United  States  for  thirty-five  years  shows  that  in  about 
half  of  the  cases,  when  money  grows  more  abundant,  in- 
terest is  higher,  and  in  half  of  the  cases  it  is  lower.  In 
other  words,  interest  changes  with  absolutely  no  relation 
to  the  quantity  of  money  in  circulation."  l 

1  Elementary  Principles  of  Economics,  p.  359. 


492  Introduction  to  Economics 

5.  Variation  of  Bank  Interest. — The  operations  of  banks 
lead  many  to  believe  that  an  abundance  of  money  makes 
interest  low;  they  observe  that  when  the  banks  have  sur- 
plus funds  they  lower  the  rate  in  order  to  attract  borrowers. 
It  is  true  that  the  banker's  prosperity  consists  in  keeping 
his  funds  active;  it  is  as  much  against  his  interest  to  have 
idle  money  as  it  is  detrimental  to  the  merchant  to  have  an 
idle  stock  of  goods. 

He  is  compelled  by  law  and  custom  to  maintain  certain 
reserves.  When  his  reserves  are  far  above  requirements, 
he  artificially  lowers  the  rate  in  order  to  put  his  idle  money 
to  work.  When  his  reserves  are  low,  he  must  protect 
them,  and  the  way  to  do  this  is  to  raise  the  rate  high 
enough  to  discourage  borrowers.  Thus  the  bank  rate  is 
artificially  varied  with  respect  to  reserves,  and  it  is  not 
necessarily  in  keeping  with  the  true  rate  of  interest  pre- 
vailing in  industry. 

When  a  considerable  portion  of  the  money  in  the  com- 
munity flows  into  the  banks,  the  banker  will  lower  his 
rate;  but  when  a  relatively  larger  share  goes  into  the  tills 
and  pockets  of  the  people,  the  bank  will  raise  its  rate. 

6.  Gross  Interest  and  Net  Interest. — It  is  advisable  to 
keep  in  mind  the  distinction  between  net  or  true  interest 
and  gross  interest.  It  is  well  known  that  the  merchant 
who  sells  on  time  has  many  bad  debts  and  difficulties  of 
collection  which  are  burdensome  and  costly.  His  risk  is 
covered  in  part  by  charging  a  higher  price;  the  honest  who 
punctually  pay  their  debts  are  made  to  pay  a  higher  price 
because  of  the  shortcomings  of  others.  In  the  same  man- 
ner, when  money  is  loaned  to  promote  an  uncertain  enter- 
prise or  hazardous  undertaking,  or  if  the  borrower  is 
doubtful,  the  charge  exacted  for  the  loan  will  be  raised  to 


Interest  493 

a  point  at  which  it  will  be  a  compensation  for  the  amount 
of  risk.  The  ordinary  rate  of  interest  on  safe  securities 
will  not  attract  capital  to  an  employment  known  to  be 
uncertain  in  its  returns,  or  exposed  to  dangerous  accidents. 
The  manufacture  of  explosives,  shipping  projects  when 
enemy  submarines  are  threatening,  mining  operations  of 
uncertain  types,  are  compelled  to  pay  the  true  interest 
for  their  capital  and  an  additional  amount  to  cover  risk. 
Thus  gross  interest  covers  both  net  interest  and  insurance. 

Furthermore,  the  gross  interest  is  high  on  petty,  short- 
time  loans.  If  one  has  $20,000  to  loan,  he  has  little  diffi- 
culty of  bookkeeping  and  labor  if  he  places  it  out  on  a  safe 
first  mortgage  to  one  person  for  a  number  of  years.  But 
if  he  loans  to  a  thousand  or  more  persons,  in  small  sums 
for  varying  periods  of  time,  he  has  much  clerical  worry 
and  extra  cost.  To  cover  this  cost  he  must  require  a  rate 
higher  than  that  prevailing  on  safe  long-time  loans.  Gross 
interest  then  covers  three  payments — net  interest,  insur- 
ance for  risk,  and  cost  of  doing  business. 

7.  Time-Discount. — In  order  to  set  a  number  of  princi- 
ples in  their  true  relationship,  the  example  of  the  evalua- 
tion of  a  farm  may  be  given.  The  order  of  thought  runs: 
Farm  ■»-►  crop  (usance)  *►-*■  value  of  crops  (value  of  usance) 
m-+  rents  »-*■  time-discount  *»-►  present  capital  value  of  the 
farm. 

The  farm  and  crops  form  the  physical  basis  for  the  value 
problem.  Then  arises  the  rent  problem,  which  is  con- 
cerned with  the  valuation  of  usances  as  they  arise,  and  the 
payment  of  rent  by  one  person  to  another  for  the  tem- 
porary uses  of  the  productive  agent.  Following  and 
closely  akin  to  the  rent  problem  comes  the  principle  of 
time-discount,  which  has  to  do  with  finding  the  present 


494  Introduction  to  Economics 

worth  of  a  series  of  future  rents  or  usance  values.  The 
present  monetary  worth  of  the  sum  of  the  future  rents  of 
an  agent  is,  of  course,  the  capitalized  value  of  the  agent. 

It  is  clear  that  agents  are  valuable  because  they  produce 
a  valuable  yield,  but  if  the  capital  value  of  an  agent  is 
determined  by  its  future  yields,  how  shall  we  account  for 
the  limited  capital  value  of  a  durable  agent  ? 

Let  us  consider  an  acre  of  land  whose  net  annual  yield 
is  $10.  So  far  as  we  know,  it  will  continue  this  yield 
through  time.  Why  is  it  not  worth  oo,  an  incalculable 
sum?  Why  does  it  have  a  limited  capital  value  of  $200? 
Time-discount  is  the  answer.  Were  there  no  time-dis- 
count, there  would  be  no  limit  to  its  capital  value.  Why 
will  the  borrower  exchange  $106  a  year  hence  for  the  pos- 
session of  $100  now?  Time-discount.  Time-discount  is 
involved  in  the  valuation  of  every  agent  which  lasts  be- 
yond the  present. 

In  the  capitalization  of  any  durable  agent  three  ideas 
must  be  kept  in  mind;  the  value  of  the  usance  (yield),  the 
distribution  of  usances  (yields)  through  time,  and  time- 
discount. 

8.  Illustration. 


$50 


$50                 $50 

$50 

$50 

Figure  No.  i 

— —  on 

Let  (A  \  represent  a  productive  agent,  and  the  length 
the  lines  to  the  right  will  represent  the  present  worth  of 
succeeding  annual  incomes.  It  will  be  observed  that  each 
income  when  it  arises  is  worth  $50,  but  that  the  present 
value  of  each  grows  less  and  less  as  it  is  postponed  farther 
and  farther  through  time.     The  total  length  of  all  these 


Interest  495 

lines,  representing  as  they  do  the  present  worth  of  each  suc- 
cessive income,  is  equal  to  the  present  worth  of  the  agent.1 

9.  Time-Discount  in  Capitalization. — Capitalization  is 
the  process  of  determining  the  present  money  worth 
of  durable  sources  of  valuable  incomes.  Time-discount 
neither  precedes  nor  follows  this  process;  it  is  itself  the 
essence  of  the  process. 

High  time-discount  means  a  low  capitalization,  and 
vice  versa.  This  must  be  so,  for  the  present  capital  value 
is  but  the  summation  of  the  present  worth  of  all  the  antici- 
pated incomes.  If  one  highly  discounts  a  future  income, 
its  present  worth  must  be  small,  and  the  total  present 
worth  of  all  incomes  must  be  low  when  all  are  highly  dis- 
counted. 

Time-discount  enables  us  to  compare  the  value  of  pres- 
ent consumable  goods  with  that  of  future  goods;  it  gives 
the  basis  for  exchanging  present  ripe  goods  for  the  durable 
agents  of  production.  Exchange  or  trade  is  based  upon 
the  present  worth  of  goods.  The  economic  world  centres 
in  the  present.  Present  ripe  goods  and  services  may  be 
compared  and  exchanged  against  each  other  without  time- 
discount,  but  every  valuation  and  exchange  involving  dura- 
ble or  future  goods  would  be  impossible  without  time-dis- 
count. 

In  the  language  of  Professor  Fetter,  "Whenever  two 

1  To  give  a  formula:  Suppose  a  rent-bearer  yield  equal  annual  rentals  (a) 
in  perpetuity,  and  the  rate  of  time-discount,  r,  then  the  value  of  the  agent, 
or  its  present  worth,  P,  might  be  expressed  by  the  geometrical  infinite  series: 

a                a                  a                  a 
p  = 1 1 1 h  etc.  to  00 

i+r       (i  +  r)2       (i  +  r)3       (i  +  0* 
Taken  from  Fetter's  Principles  of  Economics.     2d.  ed.,  1910,  p.  586.     See 
Tanner's  Algebra,  pp.  336-339. 


496  Introduction  to  Economics 

non-synchronous  gratifications,  rents  or  series  of  rents,  are 
exchanged,  they  must  be  discounted  to  their  present  worth 
to  be  made  comparable."  l 

10.  Capitalization  and  Interest. — In  keeping  with  com- 
mercial usage  interest  is  here  defined  as  a  payment  for 
contract  loans  made  in  terms  of  money.  Interest  is  ex- 
pressed as  a  per  cent;  it  expresses  the  exchange  ratio  of 
the  present  capital  value  of  an  agent  to  that  of  an  annual 
yield  of  that  agent.  If  $100  now  is  exchanged  or  loaned 
for  $105  to  be  paid  a  year  hence,  we  say  that  the  interest 
is  5/100,  or  5  per  cent.  Thus  interest  is  but  a  percentual 
expression  of  the  time-discount  on  money  loans. 

Men  borrow  money  in  order  to  invest  it  in  other  things. 
Because  money  is  readily  exchangeable  for  other  goods,  it 
follows  that  the  same  time-discount  involved  in  the  capi- 
talization of  goods  also  prevails  in  money  loans. 

11.  Adjustment  of  Interest  to  Capitalization. — We  have 
made  clear  that  the  price  of  durable  goods  involves  some 
rate  of  time-discount.  Business  men  borrow  and  pay  in- 
terest for  money  with  which  to  buy  these  durable  goods. 
The  contract  interest  or  price  paid  for  the  use  of  this 
money  will  approximate  the  rate  of  time-discount  which 
determines  the  price  of  durable  goods.  Were  interest  on 
money  lower  than  the  rate  of  time-discount  at  which 
goods  are  priced,  all  would  be  borrowers  and  lenders 
would  disappear.  Certainly  all  would  borrow  money  at 
a  low  interest  to  invest  in  durable  goods  yielding  a  higher 
rate  of  return.  Lenders  would  disappear,  for  would  one 
loan  money  at  3  per  cent  which  he  could  invest  at  8  per 
cent? 

What,  on  the  contrary,  would  result  were  interest  on 
1  American  Economic  Review,  March,  1914,  p.  74. 


Interest  497 

money  higher  than  the  rate  of  time-discount  on  the  future 
returns  of  durable  goods  ?  The  result  would  be  that  none 
would  desire  to  borrow.  What  motive  would  there  be  for 
borrowing  at  10  per  cent  to  invest  at  4  per  cent?  Men 
will  cease  to  borrow  the  moment  that  interest  on  money 
exceeds  the  rate  of  time-discount  involved  in  the  capitaliza- 
tion of  goods.  Precisely  the  same  cause  that  would  drive 
borrowers  from  the  market  would  multiply  lenders  in  the 
market.  The  moment  interest  on  money  attains  a  higher 
rate  than  investments  will  yield,  lenders  are  multiplied 
and  borrowers  are  absent. 

The  demand  for  money  and  the  supply  of  it  reach  an 
equilibrium  which  conforms  in  the  long  run  to  the  rate  of 
time-discount  in  the  capitalization  of  durable  goods.  Ex- 
pressed differently,  the  interest  or  price  paid  for  the 
present  use  of  money  conforms  to  the  price  of  durable 
agents. 

12.  The  Present  Worth  of  a  Bond. — The  purchase  of  a 
government  or  corporation  bond  may,  with  accuracy,  be 
spoken  of  either  as  an  "investment,"  or  as  a  "money  loan." 
The  price  of  the  bond  is  the  discounted  future  payments — 
principal  and  interest — specified  on  the  face  of  the  bond. 
Consider  a  $1,000  "5  per  cent"  ten-year  bond.  This  bond 
is  an  obligation  on  the  part  of  the  issuer  to  pay  $50  a  year 
for  ten  years,  and  to  return  the  $1,000  at  the  end  of  the 
loan  period.  What  is  the  selling  price  of  the  bond?  The 
solution  consists  in  finding  the  total  present  worth  of  each 
$50  payment  and  that  of  the  principal  due  ten  years  hence. 
Assume  that  the  time-discount  as  expressed  in  the  rate  of 
interest  is  5  per  cent.  The  first  $50  payment  due  one 
year  hence  has  a  present  value  of  $47.62,  or  $50  -f-  1.05. 
The  present  value  of  the  second  payment  is  $50  -f-  (1.05)2, 


498  Introduction  to  Economics 

or  $45.35;  the  present  value  of  the  third  is  $50  ■¥  (1.05)3, 
or  $43.19,  and  so  on  to  the  tenth,  whose  present  worth  is 
$50  -J-  (1.05)10,  or  $30.69.  The  present  value  of  the  princi- 
pal is  $1,000  -T-  (1.05)10,  or  $613.94.  Adding  these,  we  find 
$47.62  +  $45-35  +  $43-i9  +  $41-14  +  $39-*7  +  &37-31 
+  $35-53  +  $33-84  +  h2-22  +  $30-69  +  $6i3-94  equals 
$1,000. 

13.  Money  Loans  Analogous  to  Investments. — As  the 
money  paid  for  a  bond  may  be  considered  either  as  a  loan 
or  as  an  investment,  so  the  money  paid  for  shares  of  stock 
or  for  land  or  buildings  may,  by  analogy,  be  regarded  in 
the  same  way.  Assuming  a  discount  rate  of  5  per  cent,  a 
farm  from  which  is  expected  a  net  annual  yield  of  $2,000 
will  be  worth  $40,000.  The  purchaser  makes  5  per  cent  on 
his  money,  as  he  would  by  loaning  his  money  or  by  pur- 
chasing a  bond.  So  closely  akin  is  time-discount  in  the 
capitalization  of  goods  to  the  interest  on  money  that  many 
writers  call  them  both  interest. 

14.  The  Interest  Rate  Reflects  Time-Discount. — While 
these  concepts  are  closely  related,  they  are  not  to  be  con- 
fused. The  rate  of  interest  is  a  mere  arithmetical  expres- 
sion of  the  more  subtle  concept  of  time-discount,  or  differ- 
ence in  the  value  of  like  goods  at  different  times. 

The  rate  of  interest  is  strictly  a  monetary  concept,  and 
lending  money  at  interest  is  of  comparatively  recent  origin. 
Long  before  men  began  to  puzzle  over  interest  on  money 
they  were  valuing  deferred  incomes  and  durable  goods. 
Men  were  putting  a  present  worth  upon  more  or  less  dura- 
ble sources  of  income,  and  carrying  on  trade  in  these  long 
before  there  was  a  money  economy  to  furnish  an  arithmetic 
interest  rate.  But  could  they  put  a  present  valuation 
upon  durable  goods  or  future  incomes  apart  from  time- 


Interest  499 

discount  ?  This  is  unthinkable,  for  without  discount  there 
would  be  no  limit  to  the  value  of  durable  goods. 

Could  man  place  a  present  capital  value  on  durable 
sources  of  income  apart  from  a  rate  of  interest?1  I 
answer  in  the  affirmative,  and  offer  as  proof  the  fact  that 
this  was  done  prior  to  the  money  economy,  and  is  still 
done  in  countless  instances. 

The  rate  of  interest  no  more  accounts  for  the  value  ratio 
between  durable  agents  and  their  annual  yield  than  a  yard- 
stick accounts  for  length. 

15.  Fallacy  of  Inversion. — There  are  authors  who  see 
clearly  that  interest  as  a  value  problem  has  to  do  with 
the  discounting  of  values  through  time.  They  clearly  dis- 
tinguish interest  as  a  time-price  from  rent  as  a  product-price 
problem.  They  see  that  the  essence  of  interest  is  time, 
while  that  of  rent  is  productivity.  What  they  do  not  see 
is  that  both  historically  and  logically  the  capitalization  of 
productive  or  acquisitive  agents  must  be  given  priority 
above  interest. 

Noteworthy  economists  not  infrequently  fall  into  this 
fallacy  of  inversion.  To  state  the  fallacy  in  the  form  of  a 
question  and  answer:  How  determine  the  rate  of  interest 
yielded  by  a  capital  agent?  This  question,  according  to 
the  fallacious  reply,  cannot  be  answered  without  a  knowl- 
edge of  the  value  of  the  agent;  and  the  value  of  the  agent 
cannot  be  obtained  without  assuming  a  rate  of  interest 
and  using  it  in  discounting  the  income  which  the  agent 
yields.  Note  that  the  answer  to  the  question  is  assumed, 
not  accounted  for.  To  assume  a  rate  ready-made  neither 
gives  a  theory  nor  accounts  for  anything.  There  is  no 
more  reason  for  assuming  the  rate  of  interest  than  for 

1  See  Davenport's  Economics  of  Enterprise,  pp.  231-232. 


500  Introduction  to  Economics 

assuming  prices  in  general.  In  fact,  the  above  does  assume 
prices,  for  it  is  by  means  of  the  assumed  interest  rate  that 
prices  are  found.  To  assume  the  interest  rate  is  to  beg 
the  whole  question  and  account  for  nothing. 

16.  Interest  Involved  in  Simple  Exchanges. — The  busi- 
ness man  notes  the  doings  of  Wall  Street,  or  scans  his 
morning  paper  to  find  the  interest  rate  ready-made  for  him. 
To  explain  interest  or  determine  why  the  rate  is  this  or 
that  is  not  his  task.  A  more  difficult  task  confronts  the 
economist;  he  can  neither  assume  the  rate  nor  borrow  it 
from  the  market;  he  must  account  for  and  explain  it. 

His  starting-point  is  found  in  the  present  price  of  durable 
goods  or  deferred  incomes.  He  has  the  data  for  determin- 
ing interest  in  simple  exchanges  on  the  market.  Before 
there  can  be  exchange,  goods  must  be  discounted  to  their 
present  worth  in  order  that  their  values  may  be  com- 
pared. The  ratio  between  the  exchange  value  of  a  good 
and  a  deferred  yield  of  that  good  shows  the  rate  of  time- 
discount,  and  this  rate  governs  the  interest  that  will  be 
paid  for  a  money  loan.  If  Crusoe  on  the  lonely  island 
meets  in  trade  a  wandering  adventurer,  some  rate  of  time- 
discount  marks  their  transactions,  and  this  gives  sufficient 
data  for  the  simple  arithmetical  calculation  of  a  rate  of 
interest. 

17.  Preference  for  Present  Possession. — Possession,  in 
our  exchange  economy,  gives  one  control  over  whatever 
goods  or  services  he  would  acquire;  it  puts  at  his  disposal 
incomes  either  present  or  future.  The  motive  for  dis- 
counting incomes  is  not  based  wholly  upon  "impatience 
for  present  enjoyable  goods,"  for  time-discount  prevails  in 
the  capitalization  of  goods  where  there  is  no  thought  of 
consuming  incomes  by  the  person  who  does  the  discount- 


Interest  501 

ing.  It  is  the  value  of  incomes  which  is  discounted — what 
the  person  who  discounts  incomes  proposes  to  do  with 
them  is  another  question.  He  may  consume  them  now  or 
later,  may  enjoy  them  himself,  or  give  them  to  another, 
may  reinvest  them  or  leave  them  for  heirs.  Regardless 
of  the  disposal  he  would  make  of  the  incomes,  he  discounts 
their  value  through  time  and  this  is  the  significant  thing 
in  the  interest  problem. 

Possession  or  ownership  gives  one  the  disposal  of  in- 
comes for  consumption  or  other  purposes.  Apart  from 
possession,  one  would  have  no  value  and  no  occasion  for 
discounting  value  through  time.  Possession  in  some  form, 
either  present  or  future,  is  a  condition  which  is  presup- 
posed in  the  discount  market.  Without  possession  there 
would  be  no  investments,  no  capitalization,  no  exchang- 
ing, no  borrowing  at  interest.  It  is  the  time  aspect  in  the 
value  of  our  possessions  that  causes  us  to  pay  more  for  the 
present  possession  of  $100  at  hand  than  for  the  present 
possession  of  the  right  to  collect  $100  a  year  hence. 

Apart  from  possession  there  would  be  no  need  for  such 
a  word  as  capital,  and  without  capital  no  need  for  such 
a  word  as  interest.  Why  is  not  man  himself  capital? 
Capital  is  a  possession  and  man  is  not  possessed.  He 
never  gets  capitalized,  although  he  is  productive,  and  this 
simply  because  he  is  not  a  private  possession.  Enslave 
him,  however,  then  possession  arises  and  with  it  capitaliza- 
tion, capital,  and  interest. 

The  motive  back  of  possession  is  to  secure  the  disposal 
of  valuable  incomes;  it  is  a  part  of  human  nature  to  desire 
this  disposal  now  rather  than  at  a  distant  future  time;  this 
preference  for  the  present  over  the  future  disposal  of  in- 
comes is  itself  time-discount. 


502  Introduction  to  Economics 

1 8.  Apparent  Exceptions. — An  apparent  exception  to 
the  desire  for  present  over  future  possession  is  found  in 
the  use  of  goods  in  their  proper  seasons;  coal  in  winter, 
straw  hats  and  ice  in  summer.  If  it  is  July,  one  prefers 
coal  in  January  rather  than  at  the  present.  But  it  is  value 
referred  to  in  time-discount  rather  than  the  physical  thing. 
Translate  a  ton  of  coal  into  $10  in  money,  and  you  will 
find  that  $10  in  hand  is  worth  approximately  $10.30  six 
months  from  now.  To  the  average  householder  the  coal 
has  no  value  for  present  purposes;  its  present  value  is  its 
future  value  discounted.  Seasonal  goods  are  made  com- 
parable and  subject  to  commercial  transactions  only  when 
translated  into  value. 

Other  apparent  exceptions  arise  from  the  fact  that  man 
naturally  prefers  possession  or  disposal  of  present  incomes 
to  that  of  deferred  incomes.  For  instance,  people  buy 
life  insurance  with  the  full  knowledge  that  no  income  will 
accrue  until  after  death.  They  have  the  disposal  of  the 
income  when  they  choose  the  beneficiary,  otherwise  no 
insurance  would  be  written.  But  the  puzzle  is  this:  How 
does  the  present  outlay  of  money  for  incomes  after  death 
show  a  natural  disposition  in  men  to  prefer  disposal  of 
present  over  future  value  incomes?  Translate  the  future 
income  and  the  present  outlay  into  value,  and  the  pre- 
miums now  paid  will  be  less  than  the  final  income.  Time- 
discount  means  but  one  thing — preference  for  present  over 
future  value  income. 

19.  The  Consumption  Idea. — It  has  been  shown  that 
time-discount  is  not  limited  to  enjoyable  income  for  con- 
sumption. Distinction  must  be  made  between  time-dis- 
count and  the  motives  for  such  discount.  Consumption 
is  but  one  among  many  such  motives;  the  term  possession 


Interest  503 

covers  them  all.  Possession  is  one's  best  economic  friend, 
for  it  gives  him  power  and  prestige  among  his  fellows, 
shields  him  from  personal  want,  provides  him  the  happy 
sense  of  security  unknown  to  those  who  walk  the  street  in 
search  of  a  job;  finally,  it  gives  him  such  disposal  as  he 
wills  over  income. 

Does  impatience  for  present  consumption  motivate  one 
to  borrow  money  at  interest  with  which  to  pay  for  insur- 
ance collectible  after  death?  Do  not  large  capitalists 
emphasize  the  building  of  fortunes  rather  than  consump- 
tion? They  invest  in  railroads,  works  of  construction, 
corporations,  and  durable  sources  of  income.  Old  men 
invest  in  unimproved  lands  with  little  hope  of  ever  enjoy- 
ing consumable  returns  from  them.  Should  returns  ma- 
ture while  they  live,  the  chances  are  they  will  be  reinvested 
in  durable  goods;  in  this  manner  consumption  will  be 
postponed. 

We  must  be  mindful  that  the  handling  of  large  volumes 
of  capital,  together  with  the  bulk  of  important  monetary 
transactions,  appertains  to  the  large  corporations  and 
industrial  enterprises  whose  incomes  are  deferred.  Here 
capital  is  handled  on  such  a  scale  as  to  far  exceed  all  other 
monetary  transactions  which  affect  the  interest  rate. 

In  every  such  transaction  there  is,  and  must  be,  in- 
volved a  rate  of  time-discount,  otherwise  there  would  be 
no  means  of  capitalizing  as  a  basis  of  the  necessary  ex- 
changes and  investments.  The  things  discounted  are  the 
future  value  incomes  from  these  capital  agents.  Are  they 
discounted  for  purposes  of  ready  consumption  ?  Is  the  idea 
of  ready  consumption  a  prerequisite  of  discount?  By  no 
means. 

The  millionaire  who  could  not  consume  his  possessions 


504  Introduction  to  Economics 

in  a  lifetime  invests  for  an  additional  million  with  as  much 
ardor  as  he  did  for  his  first  dollar,  and  in  every  such 
investment  he  discounts  future  incomes  just  as  truly  as 
the  hungry  tramp  gives  higher  appraisal  to  a  present  din- 
ner than  he  does  to  a  distant  one. 

Present  possession  tends  to  guarantee  or  underwrite 
one's  future  as  well  as  his  present.  Wealth  in  hand  may 
serve  present  needs  or  provide  means  for  future  support. 
Man  lives  according  to  a  plan,  ill  devised  perhaps,  none 
the  less  a  plan.  Possession  enables  him  to  look  to  the 
future  with  confidence.  At  the  basis  of  his  plan  of  life 
must  be  disposal  of  income.  This  disposal  of  value  in- 
comes he  prefers  now  rather  than  later,  and  the  extent  of 
this  preference  is  his  time-discount. 

The  theory  of  interest  is  an  answer  to  this  question: 
What  premium  will  people  pay  for  the  possession  of  a 
present  income  stated  in  terms  of  money  as  compared 
with  an  equivalent  income  in  terms  of  money  at  a  future 
time?  The  answer  requires  an  analysis  of  time-discount, 
and  time-discount  is  based  upon  the  motive  of  posses- 
sion. 

20.  Reasons  for  Differences  in  Time-Discount  among 
Persons. — Differences  in  the  psychology  of  persons  as  well 
as  differences  in  incomes  explain  the  various  degrees  of 
time-discount  among  persons. 

Differences  in  the  psychology  of  persons:  Emotions  kin- 
dle thought  and  inspire  intellectual  action.  They  burn 
the  objects  of  our  desires  indelibly  into  consciousness,  and 
thus  at  times  vitiate  balanced  judgment  by  giving  undue 
weight  to  some  things  over  others.  When  it  is  a  matter  of 
present  self-interest,  emotion  turns  the  magnifying  end  of 
the  telescope  to  our  intellectual  eye,  it  turns  the  minimiz- 


Interest  505 

ing  end  when  our  future  interest  is  concerned.  The  emo- 
tional medium  deflects  our  thought  as  water  deflects  the 
sunbeam.  Emotions  are  not  compelled,  not  felt  because 
they  should  be,  but  felt  when  there  is  impressive  cause. 
The  more  concrete  the  cause,  the  more  intense  is  the  emo- 
tion. One  scandalous  instance  of  a  brutal  drunkard  whip- 
ping his  wife  will  win  votes  for  prohibition,  whereas  cool 
interest  attends  the  writings  of  the  economists  on  the 
inefficiency  of  labor  occasioned  by  the  rum  habit.  Let 
orators  rave  and  gesticulate  wildly  on  abstract  charity, 
but  the  effect  is  not  comparable  to  that  of  the  helpless 
widow  and  child  dying  of  hunger  in  a  miserable  tenement. 
Vividly  felt  examples  are  to  thought  what  fuel  is  to  fire, 
and  these  examples  are  in  the  living  present  rather  than  in 
the  unfelt  future.  We  wince  with  a  shriek  from  present 
contact  with  a  hot  stove,  and  are  little  moved  by  the 
thought  of  future  pain.  Such  are  emotions  that  present 
hunger,  cold,  and  need,  that  present  emergencies  and  plea- 
sures stand  as  convincing  witnesses  before  the  bar  of  judg- 
ment; they  make  a  stronger  case  than  is  possible  for  the 
absent  feelings  of  the  future.  The  weight  of  approval 
favors  the  disposal  of  incomes  for  present  rather  than  for 
future  needs.  The  nature  of  our  emotions  predisposes 
the  mind  to  time-discount.1 

Education  tends  to  dispel  short-sighted  emotions.  It  is 
forward-looking  and  constructive,  and  as  such  it  oftentimes 
sacrifices  the  present  to  the  future  by  using  present  pos- 
session and  effort  as  a  source  of  future  income.  The  boy 
who  patiently  strives  for  higher  education  is  converting 
present  toil  into  future  reward.  Thrift  and  education  go 
hand  in   hand.     Waste  and   indulgence   characterize   the 

1  See  Halleck's  Psychology,  chap.  X. 


506  Introduction  to  Economics 

ignorant  who  are  devoid  of  foresight.  This  is  shown  in 
their  scanty  savings  for  the  future,  in  their  high  time- 
discount  and  rate  of  interest. 

Love  of  posterity  is  one  of  the  greatest  incentives  to 
thrift.  It  inspires  one  both  to  produce  and  to  save  for 
the  welfare  of  his  children.  This  means,  of  course,  a  high 
estimate  on  future  incomes  or  a  low  time-discount.  It  is 
thought  that  the  disposition  to  provide  posterity  is  the 
greatest  single  influence  in  holding  down  the  rate  of  in- 
terest. A  severe  inheritance  tax  or  other  threat  to  the 
sure  delivery  of  one's  saving  to  his  children  would  be  a 
most  deadening  influence  on  thrift  and  a  direct  cause  of 
increasing  the  rate  of  discount. 

Self-control  is  in  part  a  matter  of  habit  and  in  part  a 
trait  of  character.  The  habitual  drunkard  loses  the  habit 
of  thrift  when  enslaved  to  a  base  appetite,  and  would 
mortgage  his  future  promise  for  the  temporary  gratifica- 
tion of  the  spree.  The  sons  of  foolish  rich  men  are  per- 
mitted to  accustom  themselves  to  expensive  luxuries. 
They  are  ignorant  of  the  enforced  frugality  which  is  im- 
posed upon  sons,  rich  or  poor,  who  are  wisely  forced  to 
save  and  to  learn  the  value  of  income  through  the  toil  of 
earning  it.  Spending  is  a  habit  easy  to  acquire,  and  when 
acquired  there  is  little  disposition  to  save.  There  can  be 
little  provision  for  future  welfare  when  the  mind  is  disposed 
to  spendthrift  habits.  High  time-discount  prevails  when 
appetites  and  customs  are  formed  contrary  to  the  principle 
of  thrift.  Again,  traits  of  character,  such  as  a  feeble  will 
or  pessimistic  turn  of  mind,  affect  time-discount.  With- 
out will-power  one  will  hardly  deny  his  present  emotions 
to  save  for  the  future;  in  other  words,  he  will  have  a  high 
time-discount. 


Interest  507 

The  pessimist  may  regard  the  future  from  two  points 
of  view;  first,  in  his  dyspepsia  or  cough  he  may  find  direful 
forebodings  looking  to  a  termination  of  life.  "  What's  the 
use"  to  save  for  a  future  after  death?  He  will  consume 
rather  than  save.  "Soul,  thou  hast  much  goods  laid  up 
for  many  years,  take  thine  ease,  eat,  drink,  and  be  merry"; 
to-morrow  you  may  die.  Expectation  of  a  short  life  will 
cause  a  high  time-discount.  Secondly,  the  pessimist  may 
look  for  the  worst  in  the  form  of  a  long  life  full  of  want, 
worry,  and  woe.  In  preparation,  he  will  deny  his  present 
wants  in  order  to  provide  for  his  future  needs.  The  felt 
necessity  of  providing  for  the  future  means  a  low  time- 
discount. 

Differences  in  Ike  incomes  of  persons:  Incomes  differ  in 
their  distribution  through  time;  they  also  differ  in  size, 
and  they  are  not  equally  certain  of  arriving. 

Regarding  the  distribution  of  incomes  through  time:  (a) 
For  a  period  there  may  be  no  incomes,  then  they  begin 
and  grow  larger.  If  one  goes  into  the  dry-goods  business 
in  a  stable  New  England  city,  he  will  at  first  undergo  the 
cost  of  securing  a  site,  building,  stock  of  goods,  and  mer- 
cantile equipment.  Then  follows  a  period  of  building  a 
business,  of  studying  the  market,  advertising,  and  court- 
ing good-will.  Next  comes  a  period  of  business  growth 
and  prosperity.  Finally,  when  the  business  has  grown 
to  the  extent  of  the  market,  it  has  reached  a  stage  of 
returns  more  or  less  constant.  From  first  to  last  the  in- 
come curve  would  look  somewhat  as  shown  in  figure  on 
next  page. 

This  curve  represents  incomes  deferred,  and  at  the  be- 
ginning of  this  period  one  will  have  ordinarily  a  high  time- 
discount.     Why?     Financial  burdens  are  pressing,  while 


508  Introduction  to  Economics 

incomes  years  hence  are  promising.  If  by  discounting 
some  of  these  future  incomes  he  could  secure  means  to 
meet  his  present  burdens,  he  would  surely  discount,  and 
that,  too,  at  a  high  rate. 


i 
i 

i 
i 
i 

/ 


1/ 


8/ 


<&' 


Figure  No.  2 

(b)  Some  incomes,  as  the  remuneration  for  professional 
services,  start  at  a  small  figure  and  grow  step  by  step  to 
large  returns.  For  the  reason  just  given,  time-discount 
would  be  high  in  the  earlier  stages  of  the  course  of  in- 
comes. 

(c)  Certain  incomes  tend  from  the  beginning  to  be  more 
or  less  constant.  Incomes  of  this  type  are  found  among 
those  who  own  improved  real  estate,  stable  businesses,  and 
among  passive  capitalists  who  loan  on  long-time  contracts. 
The  owner  of  a  constant  income,  other  things  being  equal, 
is  likely  to  have  a  normal  time-discount. 

(d)  The  mining  business  typifies  a  course  of  income  that 
is  large  in  its  early  stages,  but  which  diminishes  as  time 
advances.  Growing  costs  accompany  the  driving  of  en- 
tries farther  and  farther  from  the  mouth  of  the  mine. 
Some  of  the  best-known  mines  in  this  country  have  been 


Interest  509 

abandoned,  not  because  the  coal  is  exhausted,  but  because 
the  increasing  cost  of  securing  it  has  come  to  equal  the 
price  of  the  coal.  After  the  initial  cost  of  opening  the 
mine,  a  curve  representing  the  course  of  incomes  will 
appear  as  follows : 


Figure  No.  3 

(e)  The  size  of  income  has  its  bearing  on  time-discount. 
The  poor — those  whose  incomes  are  small — tend  to  have 
a  high  time-preference.  The  sting  of  poverty  arouses  the 
emotions  in  behalf  of  present  self-interests.  Present  hun- 
ger is  more  appealing  than  a  sound  argument  for  a  good 
breakfast  next  year.  The  poor  man  knows  that  he  should 
save,  that  he  cannot  have  his  cake  and  eat  it,  too;  but  his 
present  need  makes  the  stronger  appeal,  for  how  could  he 
have  a  future  unless  he  maintains  the  present  ? 

(/")  The  uncertainty  of  income  affects  time-discount.  If 
one  contemplates  a  short  life  because  of  ill-health,  or  pessi- 
mism, or  a  hazardous  occupation,  he  will  have,  as  we  have 
seen,  a  high  time-discount.  If  he  lives  under  an  unstable 
government  or  where  outlaws  as  Villa  abound,  or  if  a  dan- 
gerous military  power  seeking  conquest  threatens  invasion, 
the  effect  will  be  that  of  high  time-discount.  During  the 
Civil  War  many  who  were  in  the  territory  of  Sherman's 
march  to  the  sea  abandoned  all  idea  of  saving;  they  burned 
their  houses  and  destroyed  their  property  rather  than  risk 
its  capture  by  the  foe.     Time-discount  is  high  where  there 


510  Introduction  to  Economics 

is  risk  of  securing  income.  Loans  to  a  questionable  char- 
acter are  always  at  a  high  rate.  On  the  contrary,  if  one 
has  a  good  present  income,  and  if  there  are  chances  of  his 
losing  it  in  the  future,  his  time-discount  will  be  low,  for  he 
will  wish  to  save  a  portion  of  his  present  means  as  a  pro- 
vision against  a  possible  "rainy  day." 

The  following  chapter  is  a  continuation  of  the  same  subject. 
The  exercises  will  follow  the  completion  of  the  discussion. 


CHAPTER  XXIII 
INTEREST,  FURTHER   CONSIDERED 

i.  Determining  a  rate  of  interest.  2.  Borrowers.  3.  Adjustments  in  the 
market.  4.  The  supply  side  of  the  money  market.  5.  The  order  of 
thought:  Production  and  discount.  6.  Questions  and  answers  involving  the 
foregoing  principles.     7.  Exercises. 

I.  Determining  a  Rate  of  Interest. — In  a  previous  chap- 
ter we  saw  how,  through  the  operations  of  supply  and  de- 
mand, a  common  market  price  is  established  among  indi- 
viduals with  different  valuations  in  mind.  We  find  a 
common  rate  of  interest  or  market  price  on  money  loans 
in  a  similar  manner.  Time-discount  is  an  individual  mat- 
ter varying  from  person  to  person,  but  the  market  rate  of 
interest,  like  the  market  price  of  corn,  is  the  same  for  each 
and  all. 

I  shall  not  take  space  to  repeat  the  process  of  finding 
the  market  price,  or  equating-point  between  supply  and 
demand,  where  there  are  numerous  buyers  and  sellers.  A 
simple  illustration  will  suffice. 

Let  us  imagine  the  case  of  a  professional  man  who  is 
fifty-five  years  of  age.  He  now  has  abundant  savings  and 
a  large  income,  but  he  looks  forward  to  the  not-distant 
future  when  his  income  will  diminish  below  what  his 
needs  require.  His  foresight  and  mature  judgment  enable 
him  to  paint  mentally  a  vivid  picture  of  his  future  circum- 
stances, and  teach  him  the  necessity  of  skimping  now  that 
he  may  have  larger  funds  at  his  future  disposal.  Will  he 
be  a  spendthrift  now  and  highly  discount  his  future  in- 

511 


512  Introduction  to  Economics 

comes  for  his  present  disposal?  Precisely  the  contrary, 
for  he  will  wish  to  take  from  his  present  abundance  and 
add  to  his  future  funds  for  the  coming  need.  How  may 
he  do  this?  This  may  be  accomplished  by  loaning,  for 
the  amount  now  loaned  is  subtracted  from  his  present  pos- 
sessions and  when  future  payment  is  made  the  principal 
plus  interest  will  then  be  added  to  his  possessions.  As- 
sume that  his  time-discount  is  so  low  that  he  would  be 
willing,  if  necessary,  to  take  i  per  cent  interest. 

On  the  other  hand,  let  us  consider  a  young  man  better 
equipped  with  imagination  than  judgment,  who  is  begin- 
ning a  business  career.  He  has  limited  means  and  high 
expectations  for  a  prosperous  future.  He  may  be  a  new 
graduate  with  diploma  in  hand,  looking  forward  to  a  home 
in  the  millionaire  row,  with  every  amusement  at  his  com- 
mand, and  with  learning  enough  to  confound  the  wisest. 
Youth  may  indulge  in  castle-building,  for  these  are  the 
only  structures  whose  final  cost  do  not  exceed  the  original 
estimate.  But  after  revelling  for  a  time  in  these  imagina- 
tive sweets,  too  often  the  dry  bread  of  actual  toil  becomes 
exceedingly  distasteful.  The  happiest  moments  of  life  are 
those  of  fond  anticipation;  or  as  the  Vicar  of  Wakefield 
would  say:  "It  has  been  a  thousand  times  observed,  and  I 
must  observe  it  once  more,  that  the  hours  we  pass  with 
happy  prospects  in  view  are  more  pleasing  than  those 
crowned  with  fruition.  In  the  first  case  we  cook  the  dish 
to  our  own  appetite;  in  the  latter  nature  cooks  it  for  us." 

At  any  rate,  our  young  man,  now  pressed  for  means  and 
distanced  by  his  competitors,  would  gladly  trade  a  portion 
of  his  anticipated  bounty  for  the  present  possession  of 
funds.  He  who  would  discount  the  future  at  a  prodigious 
rate  in  behalf  of  his  present  rate  becomes  a  borrower. 


Interest,  Further  Considered  513 

Assume  that  his  time-discount  is  so  high  that  he  would  be 
willing  to  pay  10  per  cent  if  he  had  to  do  so. 

These  two  men — the  one  a  lender  who  would  take  i  per 
cent,  and  the  other  a  borrower  who  would  pay  10  per  cent 
— meet  and  bargain  on  a  loan.  While  the  lender  would 
take  i  per  cent,  he  is  anxious  to  get  as  much  as  he  can. 
And  while  the  borrower  would  pay  as  much  as  10  per  cent, 
he  is  anxious  to  pay  as  little  as  possible.  Perhaps  they 
haggle  and  chaffer  for  advantage;  the  borrower  may  offer 
2  per  cent  while  the  lender  offers  to  take  9  per  cent;  they 
give  and  take,  finally,  adopting  the  trader's  rule:  they  split 
the  difference  and  agree  on  5  per  cent.  The  interest  rate 
thus  determined  may  not  exactly  coincide  with  the  time- 
discount  of  any  borrower  and  lender,  regardless  of  how 
many  there  may  be. 

2.  Borrowers. — There  are  numerous  purposes  for  bor- 
rowing money  at  interest,  but  these  may  be  divided  into 
three  classes:  to  secure  profit  from  immediate  transactions; 
to  invest  in  durable  sources  of  income;  to  secure  present 
enjoyable  goods  and  services. 

(a)  Borrowing  to  secure  present  profits  is  the  cause  of  a 
large  volume  of  money  loans.  An  unscrupulous  broker 
found  a  purchaser  who  offered  $1,000  for  a  certain  lot. 
Knowing  that  the  real  owner  would  sell  it  for  $400,  the 
broker  wished  to  purchase  it  at  the  lower  in  order  to  sell  it 
at  the  higher  figure.  Finding  no  accommodation  at  his 
bank,  he  approached  a  loan  shark,  who  advanced  him  $400 
on  condition  that  he  return  $500  within  fifteen  days. 
The  broker  made  the  loan,  bought  and  sold  the  lot,  paid 
the  lender  $500,  and  cleared  $500  on  the  transaction.  Was 
this  a  loan  made  at  the  equivalent  of  an  annual  rate  of 
some  600  per  cent  ?     Certainly  not.     From  the  standpoint 


514  Introduction  to  Economics 

of  the  borrower  it  was  all  but  a  pure  case  of  an  ill-gotten 
profit  of  $500;  it  was  as  if  he  had  surreptitiously  traded 
$500  for  $1,000.  The  $100  gross  interest  had  in  it  but  a 
small  tincture  of  real  interest. 

Much  money  is  borrowed  for  short  periods  and  at  call 
to  purchase  goods  for  immediate  resale  at  a  profit.  Trans- 
actions on  stock  and  produce  exchanges  are  financed  by 
such  loans.  Bank  loans  for  such  transactions  are  not  in- 
frequently at  rates  far  in  excess  of  the  true  market  rate. 
Examples  of  gross  interest  in  transactions  for  immediate 
profit  might  be  multiplied. 

Any  one,  whether  his  time-discount  be  high  or  low,  will 
be  a  borrower  when  he  can  secure  immediate  profit.  In 
short  periods,  time-discount  plays  but  a  minor  part;  to 
secure  profits  is  the  motive  upon  which  the  borrower  acts. 

(b)  Borrowing  for  Purposes  of  Consumption:  Economists 
who  reason  that  interest  is  wholly  a  matter  of  the  discount- 
ing of  values  through  time  are,  in  so  far,  correct,  but  when 
economists  take  the  next  step  and  base  time-discount  upon 
the  impatience  for  present  consumption,  they  commit 
gross  error.  They  reason  as  though  borrowers  were  ruled 
wholly  by  their  stomachs  and  love  for  present  ostentation. 
Economists  are  correct  in  basing  interest  on  time-discount, 
but  are  erroneous  in  limiting  time-discount  to  enjoyable 
goods  for  ready  consumption.  High  time-discount  means 
a  low  appraisal  upon  remote  incomes  and  the  sources  of 
such  incomes.  With  little  regard  for  the  future,  the  im- 
provident are  willing  to  pledge  recklessly  their  future  in- 
come as  security  for  money  loans  to  obtain  enjoyable 
goods.  Moreover,  what  care  they  to  offer  an  exorbitant 
interest  ?  For  the  deferred  payment  of  it  will  be  made  with 
future  incomes  which  at  present  are  lightly  appraised. 


Interest,  Further  Considered  515 

I  shall  now  give  as  brief  a  statement  as  possible  of  this, 
as  I  believe,  false  consumption  theory.  Money  loans,  of 
course,  will  go  to  the  borrowers  offering  the  highest  inter- 
est, and  the  highest  interest  will  be  offered  by  those  hav- 
ing the  highest  time-discount;  but,  according  to  the  theory, 
time-discount  is  limited  to  enjoyable  goods  for  consump- 
tion, therefore  the  highest  interest  will  be  offered  by  those 
who  are  at  once  most  greedy  for  present  consumption  and 
least  regardful  for  future  incomes. 

The  reader  will  note  in  the  statement  just  given  that  no 
mention  is  made  of  borrowing  for  investment  in  business 
enterprises.  In  fact,  the  theory  assumes  that  borrowers 
are  of  a  weak-willed,  short-sighted,  spendthrift  type. 
These  same  thinkers  tell  us  that  the  lenders  have  a  low 
time-discount,  that  they  are  the  far-sighted,  self-controlled 
men  who  save. 

(c)  Borrowing  for  Investment  in  Durable  Sources  of  In- 
come. There  are  two  reasons  for  not  limiting  borrowers  to 
those  who  desire  the  ready  means  of  gratification :  (a)  The 
large  majority  of  loans  are  made  for  investment  in  enter- 
prises to  bear  future  returns;  (&)  the  spendthrift  class  who 
seek  to  borrow  for  present  enjoyable  goods  have  limited 
credit,  are  without  sufficient  means  of  securing  the  repay- 
ment of  loans  to  keep  up  the  demand  side  of  the  money 
market. 

Turn  now  to  the  theory  held  in  this  chapter,  namely, 
time-discount,  as  limited  to  the  discounting  of  value  rather 
than  to  the  discounting  of  any  particular  form  of  income. 
It  is  based  upon  the  desire  to  have  the  present  possession  or 
disposal  of  a  sum  of  capital.  This  disposal  may  be  made 
for  consumption,  life-insurance,  education,  investment,  or 
any  other  purpose.     This  is  at  once  in  contrast  with  the 


516  Introduction  to  Economics 

consumption  theory,  for  it  admits  that  largest  of  all  bor- 
rowing classes — the  conservative  type  with  a  low  time- 
discount  who  borrow  for  durable  investments. 

It  is  not  true  even  in  a  majority  of  cases  that  borrowers 
are  those  with  high  time-discount.  Some  students  who 
read  this  may  feel  that  they  are  living  examples  of  the  fal- 
sity of  the  claim.  The  conservative  and  far-seeing  who 
have  a  keen  appraisal  of  their  economic  well-being  in  the 
future  have  low  time-discount,  yet  they  are  the  very  type 
of  people  who  will  undergo  present  hardships  and  make 
interest  payments  at  high  rates  in  the  present  for  the 
means  preparatory  to  their  future  welfare. 

An  example,  perhaps  not  strictly  economic  in  all  its 
bearings,  yet  illustrative  of  the  point,  is  that  of  a  young 
man  in  my  class  at  the  time  of  this  writing.  To  go  through 
college  he  has,  he  tells  me,  relinquished  a  present  salary  of 
$1,500  and  is  borrowing  $600  a  year.  He  does  not  have 
an  established  credit,  and  must  pay  10  per  cent  annual 
interest.  Is  this  large  present  sacrifice  of  $2,160  a  year 
($1,500  relinquished  +  $600  loan  -f-  $60  interest)  because 
he  so  highly  estimates  the  present  dollar  and  so  lightly 
regards  the  future?  On  the  contrary,  his  low  time-dis- 
count— relatively  high  regard  for  the  future — causes  the 
present  sacrifice  of  high  interest,  of  money  and  diligent 
labor.  He  is  not  a  lender,  but  a  borrower  at  an  extortion- 
ate rate,  and  that  because  of  his  low  time-discount. 

Let  us  turn  now  to  the  conservative  type  of  investors. 
Our  thought  goes  from  the  struggling  youth,  trying  to  get 
ahead  in  the  world,  and  from  the  ignorant  who  squander 
needlessly,  and  from  the  spendthrifts  who  wrould  mortgage 
their  future  for  present  consumption.  Instead,  we  shall 
have  in  mind  men  of  means  and  established  credit,  the  far- 


Interest,  Further  Considered  517 

sighted  generals  of  industry  who  are  conservative  in  their 
time-discount.  These  are  the  reliable  borrowers  on  a  large 
scale  whom  the  banks,  trust  companies,  and  other  loan 
institutions  are  pleased  to  have  as  customers,  and  upon 
whom  these  institutions  chiefly  rely. 

In  former  times  the  borrowers  were  the  poor  who,  as  in 
cases  of  famine,  must  secure  means  from  the  more  fortu- 
nate to  provide  their  necessities  of  life.  Then  the  obliga- 
tion for  a  loan  rested  against  the  person  of  the  borrower. 
At  common  law,  debtors  could  be  imprisoned  for  debt. 
But  custom  has  changed;  the  chief  borrowings  to-day  are 
for  investments  in  one  form  or  another,  and  the  obligation 
for  the  return  of  the  loan  rests  upon  the  property  of  the 
borrower  rather  than  upon  his  person.  This  legal  change 
enables  only  those  of  means  to  make  important  loans. 
Whereas  the  poor  were  formerly  the  borrowers,  to-day  the 
wealthy  are  the  chief  borrowers. 

But  why  would  a  conservative  investor  pay  fora  money  loan 
a  rate  of  interest  temporarily  higher  than  his  time-discount  ? 
It  is  because  his  present  appraisal  of  future  incomes  is  so 
high  as  to  justify  the  present  sacrifice.  When  the  market 
rate  of  interest  is  5  per  cent,  let  us  assume  that  the  investor 
has  an  opportunity  to  buy  a  mill  which  promises  a  durable 
annual  net  income  of  $1,000.  This  will  be  capitalized  at 
a  sale  price  of  $20,000.  But  if  the  time-discount  of  the 
investor  should  be  2  per  cent,  his  personal  price  appraisal 
of  the  mill  would  be  $50,000.  He  will  be  glad  to  trade 
$20,000  for  what  to  his  mind  is  $50,000.  In  other  words, 
he  will  be  willing  to  give  a  large  sum  in  addition  to  the 
$20,000  for  the  mill.  This  extreme  example  shows  that 
only  those  investors  whose  time-discount  is  low  will  pay 
the  high  interest  or  undergo  the  large  present  sacrifice  to 


518  Introduction  to  Economics 

secure  a  durable  source  of  income.  Investors  in  remote 
incomes  are  willing  and  anxious  to  borrow  money  even  at 
above  market  interest,  note  the  fact,  simply  because  of 
their  low  time-discount. 

It  is  unthinkable  that  the  half-wits,  improvident,  and 
short-sighted — those  who  would  deny  the  future  for  the 
present  and  squander  durable  wealth  for  ready  consump- 
tion— that  this  impatient  and  high  time-discount  class 
should  hold  up  the  demand  side  of  the  money  market. 
Imagine  our  banks  and  great  conservative  loan  institutions 
as  rendezvous  exclusively  for  the  highly  impatient.  These 
could  not  support  a  loan  market  because  they  do  not  have 
sufficient  security  or  borrowing  power. 

Interest  eats  night  and  day,  and  the  more  it  eats  the 
hungrier  it  grows.  The  spendthrift  borrower  soon  has  his 
financial  foundation  gnawed  from  under  him,  for  debts  at 
interest  mount  with  accelerating  speed  and  hasten  the 
unwary  to  bankruptcy.  Idle  avarice  and  lazy  economy 
cannot,  for  long,  support  a  money  market. 

3.  Adjustments  in  the  Market. — The  above  illustration 
of  the  investor  in  the  mill  is  not  offered  as  typical,  for  in 
our  exchange  market,  where  exchanges  turn  on  the  slight- 
est margin  of  advantage,  individual  appraisals  are  closely 
adjusted  to  the  market  rate.  The  advantage  of  an  extreme 
case  is  that  it  tends  to  objectify  how  the  business  man 
reasons  as  to  the  rate  of  interest  he  could  afford  to  pay  for 
money.  The  business  man,  first,  makes  a  study  of  the  pro- 
ductive agent,  analyzes  the  probable  costs  and  receipts  in 
order  to  anticipate  the  net  incomes;  secondly,  he  deter- 
mines his  own  price  appraisal  of  the  agent;  third,  he 
finds  the  sale  price  at  which  he  could  make  the  purchase; 
fourth,  he  compares  his  own  price  appraisal  with  the  sale 


Interest,  Further  Considered  519 

price.  If  his  price  appraisal  exceeds  that  of  the  sale  price, 
he  will  be  anxious  to  invest  and  would,  if  necessary,  pay 
interest  exceeding  the  market  rate  for  money  to  make  the 
purchase. 

Disregarding  exceptions,  the  price  appraisal  of  active 
business  men  will  closely  approximate  the  market  price  of 
established  institutions  whose  incomes  are  fairly  constant. 
These  concerns  are  capitalized  at  the  rate  of  discount  which 
prevails  in  the  money  market.  This  market  rate  of  time- 
discount,  or  rate  of  capitalization,  is  at  the  equating-point 
between  those  with  high  and  low  time-discount.  The 
sellers  of  these  investments  will  be  those  whose  time- 
discount  exceeds  the  market  rate  of  capitalization,  and  the 
buyers,  consequently  the  borrowers,  will  have  a  lower 
discount. 

4.  The  Supply  Side  of  the  Money  Market. — If  consump- 
tion loans  are  made  by  those  with  high  time-discount  and 
investment  loans  made  by  those  with  low  time-discount, 
one  may  ask  who  is  left  to  do  the  loaning?  It  is  answered; 
the  large  class  of  passive  capitalists  such  as  retired  busi- 
ness men  of  wealth,  those  in  the  investment  market  who 
now  hold  idle  funds  in  anticipation  of  a  more  favorable 
investing  period,  widows  and  children  to  whom  funds  are 
left,  the  idle  rich.  Also  banks,  trust  companies,  life-insur- 
ance companies,  savings  and  loan  associations — in  sum, 
the  institutions  which  collect  surplus  and  idle  funds  into 
reservoirs  of  loanable  funds. 

5.  The  Order  of  Thought:  Production  and  Discount. — 
Many  thinkers  still  cling  to  the  productivity  theory  of 
interest.  They  make  bold  the  claim  that  the  time-discount 
theory  is  strangely  dissociated  from  the  production  of 
wealth.     I  shall  refute  this  false  conception  by  giving  a 


520  Introduction  to  Economics 

brief  review  of  the  order  of  thought  which  encompasses 
both  production  and  discount. 

There  could  be  no  discounting  of  values  through  time 
unless  such  values  were  in  prospect.  Productive  agents 
yield  shoes,  hats,  food,  and  other  valuable  products,  not 
all  at  once,  but  distributed  through  different  periods  of 
time.  This  is  true  of  all  agents,  as  land,  tools,  or  ma- 
chines. 

The  production  problem  studies  that  group  of  facts  hav- 
ing to  do  with  combining  materials  into  the  best  composi- 
tion, giving  them  proper  form,  putting  them  in  the  right 
place,  and  distributing  them  in  their  proper  season,  so 
that  they  are  suitable  for  the  gratification  of  desires. 

These  many  ends  of  production  may  be  combined  in 
the  one  word  usance.  Back  of  usance  are  the  productive 
agents  which  beget  it.  These  agents  obey  a  number  of 
laws,  chief  of  which  is  resistance,  inaptly  called  by  some 
diminishing  returns.  This  law  deals  with  the  limited  pro- 
ductive capacity  of  agents  in  a  limited  period  of  time. 
This  limiting  force  gives  explanation  of  the  scarcity  and, 
therefore,  the  value  of  usance.  Because  the  usance  is 
valuable,  men  pay  a  price,  called  rent,  for  the  temporary 
uses  of  these  usance-producing  agents. 

The  rent  problem,  then,  is  a  study  within  the  field  of 
production.  Were  we  to  stop  with  the  rent  problem,  we 
should  end  with  the  rise  of  valuable  incomes  distributed 
through  time  and  rent  paid  for  the  temporary  uses  of  pro- 
ductive agents.  But  this  is  not  enough;  these  agents  are 
capitalized,  bought,  and  sold  in  the  market,  and  in  our 
money  economy  funds  are  borrowed  at  times  to  effect 
these  exchanges. 

As  we  further  proceed,  however,  a  new  and  different 


Interest,  Further  Considered  521 

problem  from  production  arises;  it  is  the  problem  of  time- 
discount.  This  begins  where  the  problem  of  production 
ends.  It  assumes  these  valuable  incomes,  distributed 
through  different  periods  of  time,  as  ultimate  facts,  and 
concerns  itself  with  discounting  the  value  of  these  incomes 
through  time  to  their  present  worth.  But  what  is  their 
present  worth  ?  It  is  the  capitalized  value  or  present  price 
of  the  right  to  secure  or  control  such  incomes.  If  you  own 
land,  that  ownership  is  your  right  to  the  income  from  it, 
so  with  any  other  agent,  whether  it  be  a  house,  or  mill,  or 
franchise,  or  monopoly  right.  Control  over  value-income, 
not  the  form  of  the  agent,  is  the  important  thing,  and  this 
control  is  capital. 

Time-discount,  then,  as  applied  to  productive  agents  or 
mere  acquisitive  rights  to  income,  is  itself  the  very  essence 
of  capitalization. 

Now  exactly  this  same  time-discount  applies  to  money. 
Who  would  give  $1,000  now  for  the  return  of  $1,000  ten 
years  hence?  It  is  the  language  of  custom  and  business 
to  limit  the  word  interest  to  payments  on  money.  Much 
is  lost  and  little  gained  in  the  vain  attempt  to  apply  the 
term  interest  in  the  general  field  of  capitalization. 

6.  Questions  and  Answers  Involving  the  Foregoing 
Principles : 

(a)  What  is  the  effect  of  a  change  in  the  interest  rate  upon 
saving? 

There  are  persons  who  would  save  if  the  rate  of  interest 
dropped  to  zero,  yes,  even  if  they  had  to  pay  negative 
interest  to  get  their  money  in  safe  hands.  These  are  ex- 
ceptions. Others  would  save  more  because  of  a  lowering 
of  the  rate  of  interest.  Consider  a  parent  whose  prevail- 
ing motive  is  to  provide  for  his  children.     In  order  to  pro- 


522  Introduction  to  Economics 

vide  them  a  reasonable  income  of,  say,  $5,000  a  year,  he 
must  save  $200,000  if  the  interest  rate  is  2>£  per  cent, 
$100,000  when  interest  is  5  per  cent,  $50,000  when  the 
rate  is  10  per  cent.  But  as  high  wages  lead  to  short  hours 
among  the  improvident,  and  longer  hours  among  the 
thrifty,  so  a  sudden  shift  to  a  higher  interest  rate  would 
make  the  stronger  appeal  to  save  among  the  thrifty  who 
have  most  to  save. 

Time-discounts  do  not  become  adjusted  to  rapid  changes 
in  interest  rates.  If  such  adjustment  took  place  immedi- 
ately, modifications  of  the  interest  rate  would  have  no 
effect  on  saving. 

(b)  Would  a  non-changing  high  rate  of  interest  cause  more 
saving  than  a  non-changing  low  rate? 

Contrary  to  the  generally  accepted  opinion,  this  ques- 
tion must  be  answered  in  the  negative.  The  very  form  of 
the  question  involves  an  inversion  of  cause  and  effect  in 
the  explanation  of  interest.  A  firm  rate  of  interest, 
whether  high  or  low,  accompanies  a  stable  market  with 
an  established  rate  of  discount.  If  this  discount  on  the 
future  is  large,  it  means  certainly  a  weak  disposition  to 
practise  present  self-denial  in  order  to  save.  If  your  time- 
discount  is  high,  you  would  sacrifice  your  provision  for  the 
future  in  behalf  of  a  spendthrift  loan.  When  competition 
has  worked  its  effect  in  a  stable  market  such  as  we  assume, 
a  high  interest  rate  will  coincide  with  or  reflect  the  large 
discount  of  the  future.  A  high  interest  rate,  therefore, 
symbolizes  the  degree  of  preference  for  present  over  future 
incomes.  As  interest  is  high,  the  disposition  to  save  is 
low.  All  know  that  future  incomes  are  capitalized  low 
when  the  rate  of  interest  is  high.  Is  not  the  disposition 
to  sell  one's  future  provisioning  at  a  discounted  price  to 


Interest,  Further  Considered  523 

get  ready  money  the    antithesis  of  the    disposition  that 
would  deny  the  present  to  save  for  the  future  ? 

Time-discount  that  would  take  from  the  future  in  behalf 
of  the  present  works  contrary  to  saving.  Low  interest 
likewise  expresses  the  rate  of  time-discount  and  capitaliza- 
tion. Low  interest  expresses  a  low  discount  of  the  future, 
consequently  a  high  disposition  to  save.  In  a  well-adjusted 
market  a  large  discount  or  high  unwillingness  to  save  is 
exactly  counterbalanced  by  a  high  interest  or  reward  for 
saving.  Whatever  the  rate  of  discount,  it  will  be  equal  to 
the  rate  of  interest  that  rewards  saving.  The  causal 
sequence  is  from  the  disposition  to  save,  to  the  rate  of 
interest,  and  not  the  reverse.  Then,  in  a  community 
where  interest  is  permanently  high,  there  will  be  no  greater 
motive  for  saving  than  in  a  community  where  interest  is 
low. 

(c)  75  there  a  tendency  to  erect  lasting  structures,  to  con- 
struct durable  highways,  bridges,  and  other  lasting  improve- 
ments during  periods  when  the  interest  rate  is  high  or  during 
the  period  when  it  is  low? 

Conservative  investments,  which  take  durable  form,  are 
made  at  times  of  firm  confidence  in  the  future;  they  indi- 
cate a  high  appraisal  of  future  incomes.  During  such 
periods  time-discount  is  low  and  the  rate  of  interest  like- 
wise low.  Because  a  low  interest  rate  reflects  a  high 
appreciation  of  future  incomes,  a  marked  disposition  to 
provide  for  the  future,  it  follows  that  durable  or  lasting 
structures  will  be  made  when  the  interest  rate  is  low. 

(d)  What  is  the  motive  for  paying  interest  ? 

The  entrepreneur  borrows  money  with  which  to  buy 
productive  agents  which  will  yield  future  valuable  returns. 
These  deferred  incomes  are  discounted  in  the  price  of  the 


524  Introduction  to  Economics 

agent  yielding  them.  His  present  value  outlay  is,  there- 
fore, smaller  than  the  anticipated  returns.  His  motive  fcr 
paying  interest  is  to  secure  this  growth  in  value  through 
time.  If  he  invests  wisely  this  growth  in  value  will  be 
sufficient,  both  to  pay  the  interest  and  to  leave  him  a  gain. 

(e)  Can  there  be  a  zero  rate  of  interest  ? 

In  exceptional  cases,  money  is  loaned  without  interest, 
but  other  conditions,  such  as  friendship,  fear  of  thieves, 
and  so  forth,  enter  in  to  complicate  the  problem.  There 
are  also  exceptional  cases,  as  when  one  is  hard  put  to  it 
for  means,  when  money  would  not  be  loaned  for  many 
times  the  market  interest.  Exceptions  aside,  one  can  no 
more  conceive  of  a  zero  rate  of  interest  than  of  a  limitless 
capitalization  of  durable  sources  of  income.  The  two 
amount  to  one  and  the  same  thing.  Were  interest  zero, 
time-discount  would  also  be  zero,  the  present  worth  of  a 
dollar  fifty  years  hence  would  be  a  dollar.  There  could 
be  no  limit  to  the  present  capital  value  of  a  permanent 
agent  yielding  a  penny  annually. 

(/")  Why  is  the  interest  rate  high  during  periods  of  war  ? 

During  wars  there  is  great  social  unrest,  and  timid  capi- 
tal hesitates  to  venture  into  durable  enterprises.  Business 
ventures  are  hazardous,  because  the  future  is  uncertain. 
Ordinary  processes  of  saving  and  loaning  are  in  disuse. 
War  materials  are  destroyed  in  enormous  quantities,  men 
are  withdrawn  from  normal  productive  pursuits,  and  pro- 
duction is  carried  on  with  meagre  equipment.  Demand 
turns  from  durable  enterprises  and  calls  for  present  con- 
sumable goods.  This  demand  for  goods  to  meet  tempo- 
rary needs  brings  further  halt  to  permanent  improvements. 
Accompanying  this  enforced  neglect  of  saving  and  durable 
investments  is  a  high  time-discount.     Borrowers  are  will- 


Interest,  Further  Considered  525 

ing  to  pay  back  considerably  more  than  a  dollar  in  the 
future  for  the  present  loan  of  a  dollar.  The  economic 
pressure  of  the  present,  together  with  the  uncertainty  of 
the  future,  make  for  high  time-discount  and  its  effect — a 
high  rate  of  interest. 

7.  Exercises. — 1.  If  the  net  income  from  a  building  is 
$500  a  year  and  the  rate  of  interest  is  5  per  cent,  what 
would  be  the  price  of  the  building  ?  Show  how  you  make 
the  calculation  and  point  out  the  different  steps  in  your 
reasoning. 

2.  Should  a  new  street-railway  make  more  accessible 
the  building  referred  to  in  the  above  question  so  that  its 
net  yield  should  increase  from  $500  to  $1,000.  how  would 
the  price  of  the  building  be  affected?  Would  the  rate  of 
interest  be  changed  ? 

3.  Can  one  who  adheres  to  the  productivity  theory  of 
interest  explain  why  interest  is  paid  for  unproductive 
loans  ? 

4.  Criticise  the  following:  Interest  is  a  price  and  obeys 
all  the  laws  of  price.  So  a  large  quantity  of  money  means 
a  low  rate  of  interest. 

5.  Should  the  rate  of  time-discount  change  from  6  to  4 
per  cent,  what  change  would  take  place  in  the  price  of  a 
farm  whose  annual  net  yield  is  $4,000? 

6.  What  is  the  relationship  between  the  price  of  dura- 
tive  goods,  the  rate  of  interest,  and  time-discount? 

7.  If  it  is  now  August  you  would  prefer  a  fur  coat  in 
January,  five  months  later,  rather  than  at  the  present. 
We  prefer  goods  in  their  season,  whether  their  proper 
season  be  now  or  later.  Do  these  statements  form  excep- 
tions to  the  time-discount  theory  of  interest  ?  Does  time- 
discount  have  reference  to  physical  goods  as  such  or  to 
values  ? 

8.  Summarize  the  reasons  for  differences  in  time-discount 
among  persons  as  given  in  Chapter  XXII,  paragraph  20. 
Can  you  give  other  reasons? 


5%6  Introduction  to  Economics 

9.  Explain  how  differences  in  time-discount  cause  some 
to  be  lenders  and  others  to  be  borrowers. 

10.  How  is  the  rate  of  interest  determined  in  the  mar- 
ket? 

11.  Point  out  different  motives  for  borrowing. 

12.  Could  spendthrift  borrowers  support  the  money 
market?  Why?  What  class  of  borrowers  best  support 
the  money  market?     Why? 

13.  (a)  Aristotle  claimed  that,  as  money  does  not  pro- 
duce money,  nothing  more  than  the  return  of  the  principal 
sum  lent  can  equitably  be  claimed  by  the  lender.  Answer 
this  argument. 

(b)  Now,  criticise  Franklin's  statement  to  the  opposite 
effect:  "Money  makes  money,  and  the  money  that  money 
makes,  makes  more  money." 

14.  Do  laws  fixing  a  rate  of  interest  work  well  in  prac- 
tice?    (See  Hadley's  Economics,  139-143.) 

15.  In  the  World  Almanac  you  may  find  the  legal  rate 
of  interest  in  the  different  states.  What  explanation  can 
you  offer  for  these  differences? 

16.  One  says:  "I  can  prove  that  the  amount  of  money 
determines  the  rate  of  interest.  Does  not  the  Bank  of 
England  raise  the  rate  of  discount  (interest)  when  gold  is 
leaving  the  country?  During  panics,  when  it  is  almost 
impossible  to  borrow  money,  is  there  not  a  rise  in  inter- 
est?"    How  would  you  answer  this? 

17.  The  capital  value  of  an  agent  goes  up  as  the  interest 
rate  goes  down.     Explain. 


CHAPTER  XXIV 

FORMS  OF  INDUSTRIAL  OWNERSHIP:  THE 
CORPORATION 

i.  Introduction.  2.  Individual  ownership.  3.  Limits  to  private  own- 
ership. 4.  Partnership.  5.  Limited  partnerships.  6.  The  disadvantages 
of  a  partnership  are  many.  7.  Joint-stock  association.  8.  Corporations. 
9.  The  advantages  of  corporations.  10.  General  corporation  acts.  n. 
Directors.  12.  Election  of  directors:  Dummy  directors.  13.  Cumulative 
voting.  14.  Inside  information  of  stockholders.  15.  Negotiability  of 
stock  certificates.  16.  Securing  funds.  17.  Funds  from  creditors.  18. 
Issuing  notes.  19.  Issuing  bonds.  20.  Issuing  stocks  and  bonds.  21. 
Questionable  practices.  22.  Remedies.  23.  Foresight  in  business.  24. 
An  educational  transformation  is  now  in  process.     25.  Exercises. 

i.  Introduction. — Ours  is  an  exchange  economy  whose 
fundamental  characteristic  is  private  property.  Some  form 
of  ownership,  or  else  the  want  of  it  is,  therefore,  at  the 
basis  of  our  industrial  problems.  Whether  it  be  a  ques- 
tion of  the  distribution  of  food  products,  or  of  regulating 
production,  or  of  rate  control,  or  of  price  maintenance,  or 
of  the  enforcement  of  property  rights,  or  of  poverty  against 
riches,  or  of  conscription — these  and  many  more  are  ques- 
tions of  private  property.  The  extent  of  the  relationship 
of  the  state  to  industry  must  be  determined  on  grounds 
of  private  property.  So,  also,  must  be  determined  the 
rights  of  private  parties  in  the  business  dealings  of  man 
with  man.  From  earliest  times  the  institution  of  private 
property  has  been  subject  to  modification  and  change. 
Public  opinion  is  now  in  a  transitory  stage,  and  this  makes 
the  form  of  ownership  not  a  problem  of  the  next  century, 
but  of  to-morrow.     These  problems  of  ownership — for  that 

527 


528  Introduction  to  Economics 

matter  all  economic  problems — must  be  approached  from 
the  standpoint  of  conditions  that  are.  To  this  end  the 
student  should  read  broadly  and  spare  no  effort  in  obtain- 
ing a  clear  insight  into  the  problems  of  ownership.  A 
business  may  be  owned  by  an  individual,  partnership,  joint- 
stock  association,  or  corporation. 

2.  Individual  Ownership. — Ownership  by  an  individual 
is  the  oldest  and  simplest  form  of  ownership.  What  may 
the  individual  own?  He  may  own  tangible  forms  of 
wealth,  or  rights  against  another,  or  rights  to  do  some- 
thing to  the  exclusion  of  others.  Material  wealth,  called 
objects  of  ownership,  falls  into  two  classes:  (i)  Immovables 
or  land  and  durable  improvements,  such  as  houses;  (2) 
movables  or  things  not  attached  to  the  land.  In  legal 
terminology  the  first  class  (immovables)  is  known  as  real 
property,  and  the  second  class  (movables)  is  known  as 
personal  property. 

One  may  own  rights  against  another  person,  as  a  right 
to  compel  him  to  pay  a  promissory  note  or  to  pay  damages 
in  case  of  a  trespass  on  property  (wealth).  Under  this 
heading  may  be  considered  the  right  to  recover  stolen 
goods  and  to  enforce  contracts. 

Lastly,  a  person  may  own  rights  to  do  something  to  the 
exclusion  of  others.  Examples  of  this  kind  of  ownership 
are  patents,  copyrights,  trade-marks,  and  franchises.  A 
patent  legally  guarantees  an  individual  the  exclusive  privi- 
lege of  using  a  new  process  a  given  number  of  years;  a 
copyright  likewise  excludes  competition  for  a  specified 
time.  A  trademark  is  a  symbol,  name,  or  other  device 
which  one  puts  upon  goods  to  distinguish  them  from  like 
goods  of  other  persons.  If  A  adopts  a  trade-mark,  "Royal 
Pens,"  to  distinguish  his  product,  B  cannot  use  the  same 


Industrial  Oivnership:    The  Corporation     529 

words  or  words  so  similar  in  sound,  for  instance,  "Loyal 
Pens,"  as  might  deceive  the  average  purchaser.  A  fran- 
chise is  a  public  grant  giving  individuals  or  private  groups 
of  individuals  privileges  which  belong  to  the  state.  It 
gives  the  right  of  eminent  domain,  the  right  to  levy  tolls 
and  charges  for  public  utilities. 

3.  Limits  to  Private  Ownership. — There  are,  necessarily, 
restrictions  upon  the  private  ownership  of  all  forms  of 
wealth.  Could  a  real-estate  owner  prevent  a  right  of  way 
through  his  land,  the  public  at  large  would  be  deprived  of 
common  carriers.  The  public  welfare  must  be  protected 
against  a  private  interest;  the  state,  therefore,  reserves 
the  right  to  compel  a  landlord  to  surrender  a  right  of  way 
at  a  fair  market  price.  This  right  is  termed  the  right  of 
eminent  domain.  It  is  exercised  whenever  public  safety, 
interest,  or  expediency  so  requires.  Another  restriction  on 
private  ownership  is  that  of  the  right  of  way.  The  boun- 
dary of  an  owner's  farm  extends  to  the  middle  of  the  pub- 
lic road,  but  he  dare  not  put  his  fence  there;  the  owner's 
lot  extends  to  the  middle  of  the  street,  but  he  dare  not 
block  the  street.  Close  the  highway,  however,  and  the 
owner  takes  control  without  further  ado,  though  subject 
to  a  definite  right  of  use. 

Another  consideration,  ownership  is  the  right  of  use  in 
a  broad  and  strictly  correct  sense.  The  public  right  of  use 
is  public  ownership,  but  this  right  extends  over  all  forms 
of  wealth  and  is  exercised  when  necessity  requires.  This 
fact  makes  the  state  a  joint  owner  of  wealth.  A  tax  on 
wealth,  therefore,  is  but  the  share  which  the  state  as  joint 
owner  receives  from  the  annual  income  of  that  wealth.  If 
the  annual  income  from  a  farm  is  $100,  assuming  the  rate 
of  interest  to  be  5  per  cent,  the  price  of  the  farm  would 


530  Introduction  to  Economics 

be  $2,000.  If  the  tax  be  $25,  it  follows  that  the  share  of 
the  state  in  the  farm  is  $500,  and  that  of  the  individual  is 
$1,500.  Furthermore,  private  ownership  is  restricted 
from  the  imposition  of  a  nuisance  upon  the  public.  The 
smell  from  an  ill-kept  fish-market,  stable,  tannery,  or  fer- 
tilizer-plant will  not  be  tolerated  in  a  residential  district. 

4.  Partnership. — The  proprietor  of  a  large  business  sees 
his  task  grow  more  and  more  arduous  with  the  growth  of 
that  business.  The  business  comes  to  be  divided  into 
departments.  Capital,  special  skill,  and  knowledge  are 
required  in  the  development  of  the  business.  Need  arises 
for  mechanics,  efficiency  experts,  accountants,  salesmen, 
and  managers.  The  pressure  of  increasing  responsibilities 
may  cause  the  proprietor  to  invite  others  with  special  skill 
or  capital  to  join  with  him  as  partners  in  the  enterprise. 
A  partnership  or  firm  is  a  group  of  persons  who  have 
united  their  capital  or  energies  and  jointly  carry  on  a 
business,  acting  as  if  one  person  or  entity,  and  sharing  as 
common  owners  the  profits  of  the  enterprise. 

It  should  be  clear  that  the  mere  fact  of  sharing  profits 
is  not  the  test  of  a  partnership.  If  the  landlord  lets  his 
farm  on  shares,  agreeing  to  take  one-half  of  the  products 
of  the  farm  as  rent,  this  would  not  be  a  partnership  but  a 
lease.  If  a  book-agent  receives  one-half  of  the  profits  on 
his  sales,  this  again  is  not  a  partnership,  but  an  agency. 
In  every  partnership  there  must  be  a  community  of  inter- 
ests, a  prosecution  of  business  in  common  with  a  view  to 
profits.  A  owns  capital,  B  is  an  expert  manager,  and  C 
is  a  skilful  salesman.  A  furnishes  all  the  capital  to  start 
a  mail-order  house;  B  and  C  put  in  their  services  in  man- 
aging the  business  and  selling  the  goods.  They  agree  to 
share  profits.     This  is   clearly   a  partnership   because  it 


Industrial  Ownership:     The  Corporation     531 

meets  the  test  of  a  partnership.  It  is  a  community  of 
interest,  a  common  prosecution  of  business  with  a  view 
to  profits. 

5.  Limited  Partnerships. — In  a  general  partnership  every 
member  is  liable  legally  and  morally  for  the  acts  of  every 
other  member.  Each  partner  is  liable  for  all  the  debts 
and  obligations  of  the  firm.  A  and  B  are  partners  in  a 
small  business.  A  borrows  $50,000  in  the  firm's  name, 
pockets  the  money,  and  leaves  the  country.  The  creditor 
may  exhaust  the  assets  of  the  partnership  and,  if  these  are 
insufficient,  go  against  the  private  property  of  B  to  make 
up  the  deficiency.  In  a  limited  partnership,  however,  one 
or  more  of  the  partners,  called  special  partners,  are  not 
liable  for  the  partnership  debts  beyond  the  sum  each  has 
contributed  to  the  capital.  The  law  requires  such  part- 
nerships to  have  at  least  one  general  partner  whose  liability 
is  unlimited. 

6.  The  Disadvantages  of  a  Partnership  are  Many. — Each 
of  the  partners  has  a  controlling  voice  in  the  management 
of  the  firm.  Conflicting  opinions  may  work  to  the  injury 
of  the  policy  of  the  company.  The  firm  is  not  well  adapted 
to  collecting  large  amounts  of  capital.  It  must  for  the 
most  part  depend  upon  the  partners  for  funds.  The  fact 
of  unlimited  liability  of  the  partners  may  cause  a  loss  of 
private  property  in  addition  to  the  original  investment. 
This  is  to  be  commended  in  the  sense  that  it  makes  the 
management  conservative  and  careful.  The  main  disad- 
vantage seems  to  be  that  the  duration  of  a  partnership 
depends  upon  the  life  or  the  caprice  of  a  partner.  The 
partnership  is  dissolved  with  the  alienation,  or  withdrawal, 
or  insanity,  or  death,  or  bankruptcy  of  a  partner.  Because 
a  partnership  may  have  only  a  short  life,  it  is  unsuited  for 


532  Introduction  to  Economics 

the  formation  of  large  business  transactions  and  contracts 
which  extend  over  considerable  periods  of  time. 

7.  Joint-Stock  Association. — Joint-stock  associations  are 
partnerships  in  which  the  capital  is  divided  into  shares 
which  are  owned  by  the  partners.  These  differ  from  ordi- 
nary partnerships  in  two  respects:  (1)  They  are  not  dis- 
solved by  the  same  causes.  The  shares  are  transferable; 
for  instance,  if  a  shareholder  dies,  his  shares  pass  to  his 
estate;  if  he  sells  his  shares,  the  purchaser  succeeds  to  his 
rights.  Partners  may  withdraw  or  new  partners  may  be 
introduced  without  a  dissolution  of  the  firm.  (2)  Share- 
holders do  not  embarrass  the  management  of  the  firm; 
they  elect  directors  and  officers  who  manage  the  firm. 
Only  the  officers  have  authority  to  bind  the  firm  in  any 
financial  obligation.  None  the  less,  each  partner  stands 
personally  liable  for  the  obligations  (debts  or  contracts) 
of  the  firm. 

8.  Corporations. — A  corporation  is  an  artificial  person 
created  by  law  for  some  specific  purpose  or  purposes.  The 
members  of  a  corporation  are  not  the  corporation;  members 
may  withdraw  or  die,  but  the  artificial  person  continues. 
As  a  legal  person  it  owns  property,  may  incur  debts  and 
form  contracts,  may  sue  and  be  sued,  and  carry  on  busi- 
ness as  a  natural  person.  The  corporation  has  no  con- 
science, no  power  to  think,  but  the  law  regards  its  officers 
as  agents  empowered  to  carry  on  all  business  of  the  cor- 
poration. This  form  of  ownership  is  found  in  all  na- 
tions. At  first  it  applied  only  to  large  enterprises,  such 
as  steamship  companies  and  railroads,  later  to  smaller 
enterprises,  and  to-day  all  kinds  of  enterprises,  large  and 
small,  are  at  liberty,  and  find  it  feasible  to  adopt  this  form 
of  organization. 


Industrial  Ownership:    The  Corporation     533 

9.  The  advantages  of  corporations  over  other  forms  of 
ownership  are,  among  others,  permanency,  limited  liabil- 
ity, transferability  of  shares,  concentration  of  manage- 
ment, and  adaptability  for  securing  large  funds  of  capital. 

Permanence:  Stockholders  may  come  and  go,  may  re- 
tire, sell  their  stock  or  die,  but  the  corporation  continues 
to  live.  It  is  adaptable  to  the  undertaking  of  long-time 
contracts.  There  are,  to  be  sure,  exceptions  to  the  per- 
manency of  a  corporation  in  cases  where  charters  are 
granted  for  a  limited  number  of  years,  as,  for  example,  real- 
estate  companies  in  Massachusetts,  which  have  a  life  not 
exceeding  fifty  years. 

Limited  liability\:  A  partner  in  a  bankrupt  firm  may 
lose  his  entire  investment  and,  further,  he  may  be  forced 
to  sacrifice  his  personal  holdings  to  satisfy  the  creditors  of 
his  firm.  He  may  be  compelled  to  make  good  a  foolish  or 
fraudulent  contract  made  by  his  partner.  But  if  the  cor- 
poration fails  the  stockholder,  generally  speaking,  will  lose 
no  more  than  his  securities  in  the  corporation.  Some 
exceptions  will  be  found  to  the  rule  of  limited  liability  in 
state  laws,  the  one  important  exception  being,  that  the 
stockholders  of  national  banks  are  all  subject  to  a  double 
liability.  Limited  liability  is  given  by  many  authorities 
as  the  reason  why  the  corporate  form  of  ownership  has 
increased  so  rapidly  in  recent  years. 

Contrary  to  the  popular  conception,  limited  liability  was 
not  always  an  essential  feature  of  the  corporation.  In 
England  limited  liability  was  not  adopted  till  1855,  and 
even  now  English  companies  must  claim  this  attribute  by 
inserting  the  word  "limited"  in  connection  with  their 
names. 

Transferability  of  shares:  A  share  of  stock  is  a  unit  of 


534  Introduction  to  Economics 

ownership  in  a  corporation.  Shares  are  represented  by 
certificates  of  stock.  If  a  corporation  has  issued  a  thou- 
sand shares,  the  owner  of  one  share  owns  one  thousandth 
part  of  the  corporation.  IT  the  entire  stock  of  a  railroad 
corporation  is  bought  up  by  a  group  of  persons,  they  own 
the  railroad.  If  an  owner  wishes  to  sell  his  stock  it  is 
easy  to  find  a  buyer.  If  an  owner  has  one  hundred  shares 
for  sale,  he  may  sell  to  a  hundred  different  purchasers,  or 
to  fifty,  or  to  one  purchaser,  depending  upon  the  wishes 
and  purchasing  power  of  the  buyer.  Sales  are  made  easy 
because  the  size  of  the  sale  can  be  adjusted  to  the  means 
of  the  buyer.  It  is  difficult  for  an  individual  to  sell  his 
farm  or  other  private  holdings.  It  is  impossible  for  a 
partner  without  the  consent  of  his  partners  to  dispose  of 
his  interests  in  the  partnership  without  destroying  the 
firm.  The  welfare  of  a  firm  depends  upon  the  business 
ability  of  the  partners,  but  the  case  is  otherwise  in  a  cor- 
poration which  is  managed  by  the  directors  rather  than  by 
the  owners.  Widows,  elderly  persons,  children  who  have 
inherited  money — any  and  all  classes  may  buy  stock, 
according  to  their  means,  without  any  change  in  the 
policy  of  the  company. 

Concentration  of  management :  A  stockholder  may  own 
99  per  cent  of  the  stock  in  a  corporation  and  still  have  no 
authority  to  transact  business  for  it,  since  duly  appointed 
officers,  and  only  these,  can  transact  the  corporation's 
business.  In  this  way  a  heavy  responsibility  is  concen- 
trated upon  the  few  officers  in  a  large  corporation,  and 
they  have  great  power  either  for  good  or  for  evil. 

The  corporation  is  an  excellent  institution  for  a  large 
class  of  people  who  have  inherited  or  otherwise  acquired 
means,  but  who  are  themselves  without  the  experience  or 


Industrial  Ownership:    The  Corporation     535 

ability  to  utilize  their  means  effectively.  Two  conclusions 
are  to  be  deduced  from  this  fact:  (i)  It  is  to  the  interest 
of  society  that  the  direction  of  capital  be  removed  from 
the  hands  of  the  weak  to  the  hands  of  the  strong;  (2)  the 
incompetent  rich,  through  bad  management,  may  soon 
squander  their  means,  whereas  removing  their  control  by 
giving  the  direction  of  their  holdings  over  to  a  strong 
financial  director  will  have  the  effect  of  maintaining  their 
fortunes.  The  corporation,  it  is  argued,  tends  to  main- 
tain large  fortunes,  but  just  the  opposite  may  be  true,  for 
it  puts  wealth  in  salable  form. 

Securing  large  capital :  A  century  ago  the  only  securities 
which  the  investing  public  could  buy  were  government 
obligations,  as  the  early  stock  exchanges  knew  no  other 
form  of  securities.  The  field  was  closed  for  investment 
to  those  of  limited  means,  since  these  securities  were  sold 
in  large  amounts,  so  the  small  investor  welcomed  the  cor- 
poration with  its  transferable  shares  sold  in  any  amount 
to  accommodate  the  purchaser's  means.  This  new  form 
of  saving  and  investment  had  other  advantages.  It  mul- 
tiplied the  sources  from  which  corporations  might  draw 
funds.  Corporate  securities  are  purchased  by  all  classes 
— the  humble  who  work  for  a  pittance,  the  day-laborer, 
and  the  wealthy  aristocrat.  Some  American  corporations 
have  upward  of  100,000  stockholders.  This  inflowing  of 
capital  from  thousands  of  sources  provides  the  enormous 
funds  necessary  to  finance  our  large  industrial  enterprises. 

10.  General  Corporation  Acts. — A  charter  is,  so  to 
speak,  the  soul  of  a  corporation.  The  first  step  in  form- 
ing a  corporation  is  for  the  interested  individuals  or  incor- 
porators to  prepare  a  charter  (articles  of  incorporation  or 
certificate  of  incorporation).     The  charter  contains  a  num- 


536  Introduction  to  Economics 

ber  of  provisions,  including  the  name  of  the  corporation, 
its  objects,  amount  of  capital  stock,  and  like  provisions. 
Application  is  made  to  the  state  to  have  the  charter 
granted,  and  when  a  state  does  so,  it  creates  a  corporation. 

Formerly  the  state  legislatures  granted  charters.  When 
incorporators  wished  a  charter,  a  bill  for  that  purpose  was 
introduced  in  the  legislature,  referred  to  proper  commit- 
tees, debated  through  both  houses,  and  signed  by  the 
governor  of  the  state,  each  charter  requiring  a  separate 
and  special  act.  A  century  ago  the  granting  of  a  charter 
was  not  an  arduous  task  for  our  legislatures,  because  so 
few  of  them  were  requested.  As  time  went  on  corporations 
grew  more  and  more  popular,  and  the  numerous  demands 
for  charters  outgrew  the  capacity  of  the  legislatures  to 
grant  them.  Were  charters  granted  in  this  manner  to- 
day, it  is  doubtful  whether  legislatures  could  find  time  to 
serve  their  normal  functions.  But  the  time-consuming 
labor  of  this  system  was  not  its  most  serious  aspect. 

In  some  instances,  it  proved  a  cheap  and  effective  means 
for  unscrupulous  candidates  for  the  legislature  to  buy 
votes.  If  a  group  of  influential  business  men  desired  to 
form  a  corporation  for  a  particular  purpose,  meanwhile 
wishing  to  prevent  others  from  incorporating  for  the  same 
purpose,  they  could  secure  their  evil  aim  through  their 
representative  in  the  legislature.  A  legislator  who  has 
power  to  grant  special  privileges  is  tempted  to  favor  the 
political  boss  in  order  to  win  his  support.  This  system, 
moreover,  leads  to  political  log-rolling.  A  from  Henry 
County  says  to  B  from  Clay  County:  "Vote  with  me  in 
behalf  of  my  boss,  and  I  will  vote  with  you  in  behalf  of 
your  boss."  In  this  way  conspiring  groups  could  control 
the  granting  of  charters  and  exclusively  serve  the  favored 


Industrial  Oivnership:    The  Corporation     537 

few.  This  unfair  system  of  granting  charters  led  to  so 
much  favoritism  and  political  corruption  that  the  public 
called  for  reform. 

This  contemptible  system  was  reformed  by  "enabling 
acts"  or  "general  corporation  laws."  An  enabling  act,  in 
so  far  as  it  applies  particularly  to  corporations,  is  a  general 
corporation  act  defining  the  purposes  for  which  corpora- 
tions may  be  lawfully  formed,  the  powers  which  they  may 
possess,  the  number  of  incorporators  and  stockholders,  the 
manner  and  lawful  purpose  of  issue  of  capital  stock,  and 
so  on.  Thus  the  law  definitely  defines  the  conditions 
under  which  a  charter  will  or  will  not  be  given.  This 
enables  any  group  of  citizens,  regardless  of  "pull,"  or  poli- 
tics, or  wealth,  to  secure  a  charter,  if  they  fulfil  the  require- 
ments of  the  act.  It  is  thought  that  this  transfer  from 
special  grants  to  enabling  acts  was  the  most  important 
reform  in  business  methods  during  the  nineteenth  century. 
It  at  once  facilitates  the  granting  of  charters,  stamps  out 
an  important  means  of  political  corruption,  and  enables 
all  competitors  to  share  the  benefits  of  the  corporate  form. 
The  charter  of  a  corporation,  formed  under  general  laws, 
consists  of  the  general  law  and  its  one  particular  certificate 
of  incorporation  or  articles  of  association. 

II.  Directors. — As  above  indicated,  the  stockholders 
own  the  corporation  and  share  its  earnings.  Ownership 
implies  the  power  to  control,  but  the  stockholders  control 
a  corporation  only  indirectly.  They  elect  the  directors 
and  the  directors  elect  the  officers  who  directly  manage 
the  corporation.  The  directors  usually  comprise  a  small 
group  of  leading  stockholders.  Their  intimate  relations 
with  each  other  and  with  the  workings  of  the  corporation 
make   of   them   a   watchful   and   effective   working   unit. 


538  Introduction  to  Economics 

They  have  power  to  appoint  and  to  remove  officers.  The 
policy  and  direction  of  the  corporation  is  really  in  the 
hands  of  the  directors.  The  interests  of  the  stockholders 
are  subject  to  the  directors;  unreliable  directors  have  many 
means  of  enriching  themselves  at  the  expense  of  small 
stockholders.  The  stockholders  regard  the  personnel  of 
the  directors  as  of  vital  importance. 

12.  Election  of  Directors :  Dummy  Directors. — Directors 
are  elected  by  the  majority  vote  of  the  stockholders,  each 
stockholder  usually  having  one  vote  for  each  share  of  stock 
he  owns.  Should  one  person  own  over  50  per  cent  of  the 
shares,  he  can  elect  all  the  directors.  It  is  not  unusual 
for  a  small  group  to  maintain  a  community  of  interest  and 
dominate  the  control  of  corporations.  In  these  cases  the 
large  number  of  small  stockholders  have  no  control  over 
the  policy  and  direction  of  their  holdings. 

A  dummy  director  does  not  vote  his  own  will;  he  serves 
the  interests  of  his  master  and  votes  as  he  is  told.  A 
director,  dummy  or  other,  usually  must  hold  at  least  one 
share  of  stock.  One  who  owns  over  50  per  cent  of  the 
shares  may  go  through  the  legal  form  of  transferring  a 
share  to  each  of  a  sufficient  number  of  dummies  to  "pack" 
the  board.  After  this  work  of  deception,  he  casts  the 
necessary  number  of  votes  to  elect  his  select  dummies, 
thus  "packing"  the  board  and  assuming  imperial  rule. 

13.  Cumulative  Voting. — This  work  of  iniquity  is  de- 
feated in  some  places  by  cumulative  voting.  By  a  power 
of  cumulative  voting  the  minority  stockholders  may  elect 
representation  proportioned  in  number  to  the  number  of 
shares  they  hold.  The  following  example  will  make  clear 
the  principle  of  cumulative  voting.  If  we  assume  that 
three  directors  are  to  be  elected,  a  stockholder  owning  20 


Industrial  Ownership:    The  Corporation     539 

shares  may  cast  20  votes  for  each  of  the  three  directors, 
or  60  votes  for  one  director.  If  there  are  2,000  shares  of 
stock,  and  1,480  shares  are  owned  by  the  majority  holders, 
while  520  shares  are  held  by  the  minority,  the  minority 
by  casting  triple  votes  for  one  director  would  give  him 
1,560  votes.  This  is  a  larger  vote  than  the  majority  could 
muster  for  each  of  three  candidates  by  casting  single 
votes.  The  minority  would  elect  one  director  and  the 
majority  two. 

14.  Inside  Information  of  Stockholders. — The  owner  of 
a  share  is  part-owner  of  the  corporation,  and  it  would 
seem  that  any  man  should  be  allowed  the  privilege  of 
examining  into  his  own  property.  To  deny  him  this 
privilege  would  seem  contrary  to  the  character  and  pur- 
pose of  private  property,  yet  minority  stockholders  as  a 
rule  are  not  permitted  to  investigate  the  books  of  a  cor- 
poration. There  is  a  sound  reason  for  this.  Large  com- 
peting corporations  make  every  effort  to  excel  the  rival, 
each  competitor  working  out  new  inventions,  new  processes, 
and  trade  secrets  in  the  contest  for  advantage  in  the  mar- 
ket. These  secrets  and  inner  workings  of  a  corporation 
are  advantage  points  which  opposing  competitors  would 
like  to  secure.  Now,  if  your  business  has  secret  advantages 
which  enable  it  to  excel  my  business,  I  would  buy  a  share 
in  your  company  if  that  would  permit  me  to  examine  your 
books  and  thereby  acquire  certain  of  your  advantage 
points.  To  reveal  or  make  common  knowledge  of  one's 
advantage  points  would  deaden  one's  incentive,  retard 
individual  initiative,  and  introduce  a  spirit  of  lethargy  in 
business.  It  would  have  a  deadening  effect  like  that  pro- 
duced by  public  ownership.  The  conclusion  to  be  drawn 
from  this  reasoning  is  that  the  denying  of  inside  informa- 


540  Introduction  to  Ecojiomics 

tion  to  the  minority  holder  protects  rather  than  infringes 
upon  private  property. 

This  is  not  to  deny  that  the  stockholder  should  have 
some  information.  This  he  receives  from  well-managed 
companies  in  regular  reports  issued  annually,  and  in  some 
cases  even  quarterly  or  monthly.  In  these  reports  finan- 
cial information,  such  as  is  contained  in  balance-sheets  and 
income  statements,  is  given  as  well  as  information  regard- 
ing the  operations  of  the  company. 

15.  Negotiability  of  Stock-Certificates. — If  one  owns  a 
share  of  stock  in  a  corporation,  his  ownership  is  evidenced 
by  a  written  instrument  called  a  stock-certificate.  The 
stock-certificate  is  not  itself  the  owner-hip.  any  more  than 
a  ticket  is  a  ride  on  a  train.  The  certificate  is  to  the  own- 
ership of  stock  what  a  deed  is  to  the  ownership  of  land:  it 
is  merely  a  written  evidence.  If  you  lose  your  certificate 
or  a  rogue  steals  it.  you  still  remain  a  shareholder.  A  far 
better  evidence  of  ownership  is  secured  by  referring  to  the 
books  of  the  company  in  which  are  entered  the  names  of 
stockholders  and  the  number  of  .-hares  held  by  each. 
Should  stock-certificates  be  fully  negotiable?  Should  the 
real  ownership  pass  from  person  to  person  with  the  transfer 
of  the  certificate?  This  i-  a  debatable  question  and  the 
arguments  pro  and  con  may  be  stated  briefly. 

Affirmative:  (1)  Full  negotiability  would  facilitate  sale-, 
for  there  would  not  be  the  delay  and  trouble  of  transferring 
names  on  the  books  of  the  company.  (2)  It  would  assist 
stock-exchange  brokers  who  make  investigations  back  of 
the  certificates  to  determine  rightful  owners.  (3)  It  would 
make  certificates  more  acceptable  to  banks  for  loans. 

Negative:  (1)  If  to  obtain  a  certificate  would  render  one 
secure  in  ownership,  it  is  argued  that  there  would  be  a 


Industrial  Ownership:     The  Corporation     541 

premium  upon  forgery  and  theft.  Where  transfers  take 
place  on  the  books  of  the  corporation,  there  is  thought  to 
be  no  incentive  for  iniquitous  persons  to  steal  or  forge  the 
rightful  owner's  name  to  a  certificate.  Moreover,  if  cer- 
tificates were  negotiable,  as  are  national  bank  notes,  there 
would  be  the  danger  of  losing  them,  and  thereby  losing 
one's  ownership  in  the  corporation.  (2)  The  corporation 
would  be  unable  to  keep  a  record  of  its  stockholders.  This 
would  encourage  fraud  on  the  part  of  stockholders  and  ren- 
der it  very  difficult  to  detect  such  fraud.  (3)  Close  akin 
to  this  last  point  is  the  fact  that  the  responsibility  of  stock- 
holders would  be  lessened  because  they  would  not  be 
known.  The  corporate  form  has  come  into  such  general 
use  and  it  embodies  tremendous  capital,  therefore  it  has 
tremendous  powers  either  for  harm  or  for  good. 

Despite  these  negative  arguments,  which  sound  plausible 
when  first  encountered,  the  weight  of  reason,  the  sanction 
of  legislation  in  the  important  states  of  the  Union,  and  the 
tendency  of  public  opinion  seem  to  favor  the  full  negotia- 
bility of  stock-certificates.  Laws  making  stock  fully  nego- 
tiable have  been  passed  recently  in  Pennsylvania,  Massa- 
chusetts, New  York,  and  other  states. 

16.  Securing  Funds. — The  corporation  receives  its  funds 
from  those  who  purchase  its  bonds  or  notes,  and  those 
who  buy  its  stock;  it  is  also  aided  by  means  of  loans  at 
banks,  by  those  who  sell  it  goods  on  short-time  credit,  and 
by  the  surplus  or  undivided  earnings  left  in  the  corpora- 
tion. One  who  is  a  large  creditor  of  a  corporation  might 
well  lend  it  assistance  in  times  of  trouble.  His  purpose  in 
maintaining  the  strength  of  the  company  would  be  to  pro- 
tect the  worth  of  the  notes  or  bonds  which  he  holds  against 
it.     But  it  is  very  unusual  that  a  small  creditor  assists  a 


542  Introduction  to  Economics 

corporation,  because  he  is  almost  always  protected  in  that 
the  first  claims  to  be  settled  are  those  of  the  creditors. 

Stockholders  will  at  times  contribute  to  a  corporation  or, 
what  is  the  same,  turn  the  earnings  back  into  the  company 
rather  than  take  them  out  in  the  forms  of  dividends. 
Stockholders  may  largely  increase  their  dividends  by  con- 
tributing funds  for  the  installation  of  a  new  improvement 
or  method  that  will  augment  earnings.  By  far  the  most 
important  way  in  which  stockholders  aid  corporations  is 
to  turn  the  surplus  back  into  the  working  assets  of  the 
company.  To  this  particular  type  of  aid  has  been  attrib- 
uted in  large  part  the  financial  strength  of  the  Carnegie 
Steel,  Baldwin  Locomotive  Works,  the  Lehigh  Valley  Rail- 
road, and  others.  Shortsighted  stockholders  insist  on  im- 
mediate dividends,  even  to  the  extent  of  stunting  the 
growth  of  their  company.  Farsighted  stockholders  will 
not  bleed  the  company,  but  will  enable  it  to  grow  upon 
the  strength  of  its  own  earnings. 

If  one  takes  out  $20  in  dividends,  he  isolates  it  from  the 
benefits  of  large-scale  business.  Small  isolated  sums  are 
largely  deprived  of  earning  power,  whereas  if  small  sums 
are  allowed  to  remain  in  the  corporation  they  co-operate 
with  or  become  a  part  of  large  capital,  and  take  on  all  the 
advantages  of  large  scale  business.  During  the  growth  of 
a  corporation  up  to  the  point  of  largest  efficiency,  there  is 
an  ever-accelerating  cumulative  strength  gained  by  turning 
earnings  back  into  the  company.  If  one  takes  out  $20  in 
annual  dividends  for  five  years,  he  will  have  received  $100, 
but  ordinarily  if  he  leaves  the  dividends  in  the  company 
the  price  of  his  stock  will  have  increased  more  than  $100. 

17.  Funds  from  Creditors. — There  are  three  ways  of 
securing  funds  (or  their  equivalent)  from  creditors.     First, 


Industrial  Ownership :     The  Corporation     543 

a  company  may  so  manage  its  business  as  to  keep  itself 
constantly  indebted  to  trade  creditors.  If  a  manufactur- 
ing or  mercantile  company  buys,  say,  on  ninety  days'  time 
and  plans  its  purchases  at  such  intervals  that  they  may 
be  met  in  large  part  by  notes  receivable,  it  may  carry  on  a 
large  business  relative  to  its  invested  capital.  Assume 
that  a  mercantile  company  so  plans  its  deferred  payments 
as  to  keep  itself  constantly  in  debt  $50,000  to  trade  credi- 
tors; it  would  thus  have  the  use  of  that  sum  of  money  as 
truly  as  if  it  had  made  a  loan  in  the  open  market.  It  would 
have  continually  the  use  of  $50,000  without  interest.  The 
Roman  law  fulfilled  the  logic  of  such  transactions  when  it 
regarded  a  sale  of  goods-  on  credit  as  a  sale  for  cash  with  a 
loan  of  the  cash  to  the  buyer  from  the  seller.  Funds  may 
be  secured  from  creditors,  also,  by  the  issue  of  notes  or 
the  issue  of  bonds. 

18.  Issuing  Notes. — If  a  corporation  wishes  to  borrow 
for  a  comparatively  short  period  of  time,  it  will  ordinarily 
issue  notes.  A  note  made  to  a  bank  will  usually  run  not 
over  six  months,  but  notes  sold  to  the  public  are  likely  to 
run  from  two  to  ten  years.  The  denominations  of  notes 
vary  with  circumstances.  If  a  loan  is  made  from  a  single 
large  syndicate,  a  note  may  be  made  for  $50,000  or  $100,000 
or  more.  If,  however,  notes  are  offered  for  sale  to  the 
general  investing  public,  they  will  be  issued  in  small  de- 
nominations. 

Notes,  as  a  rule,  are  objectionable  as  a  means  of  securing 
large  sums  of  money.  They  move  too  slowly  to  satisfy 
the  requirements  of  a  commercial  bank.  On  the  other 
hand,  they  do  not  run  long  enough  to  satisfy  the  average 
individual  who  desires  a  steady  return  from  a  durable 
investment.     The  time  limit  of  notes  generally  falls  be- 


544  Introduction  to  Economics 

tween  the  time  limit  of  banks  and  of  individuals.  The 
issuing  company  has  no  means  of  foretelling  whether  the 
public  will  absorb  its  entire  note  issue,  nor  can  it  predict 
the  possibilities  of  renewing  its  notes  if  it  becomes  neces- 
sary to  do  so  at  the  date  of  their  expiration. 

With  these  objections  in  mind,  it  becomes  a  fair  question 
as  to  why  a  corporation  would  ever  issue  notes.  There 
are,  however,  occasions  which  make  it  advisable  and  all 
but  imperative  for  a  corporation  to  issue  notes.  Financiers 
becoming  expert  in  reading  the  signs  of  the  times  know 
the  good  times  and  the  poor  times  for  making  bond  issues. 
If  a  company  is  in  temporary  need  of  finance  at  a  poor 
time  for  a  bond  issue  it  will  be  well  to  issue  short-term 
notes  in  order  to  defer  the  bond  issue.  If  a  company  is 
constructing  an  improvement  which  promises  immediate 
returns  it  may  be  wise  to  issue  notes. 

19.  Issuing  Bonds. — Selling  bonds,  or  selling  notes,  is 
borrowing  money.  The  written  promise,  secured  or  un- 
secured, of  an  individual  to  pay  is  called  a  note.  The 
short- time  written  obligation  of  a  company  is  called  a  note; 
the  written  promise  to  pay  issued  by  a  government,  or  the 
long-time  written  obligations  to  pay  issued  by  a  corpora- 
tion is  called  a  bond.  If  you  hold  a  government's  bond 
or  corporation's  bond,  that  government  or  corporation  is 
indebted  to  you. 

Is  it  wise  to  borrow,  or  is  there  any  sound  reason  for 
remaining  heavily  indebted  to  others  ?  The  great  majority 
of  persons  will  answer  an  emphatic  "no."  This  dislike 
for  debt  is  inherited;  in  former  times  businesses  were  not 
financed  by  means  of  credit.  The  borrowers  were  the 
poor  who  obligated  both  their  person  and  their  property 
to  the  wealthier  classes  in  order  to  secure  necessities  in 


Industrial  Ownership:     The  Corporation     545 

times  of  need.  Debtors  have  been  put  in  stocks,  hanged 
by  the  thumbs,  suffered  long  terms  of  imprisonment,  be- 
cause of  inability  to  pay  their  debts.  Later  the  obligations 
for  debts  came  to  rest  upon  the  individual's  wealth  rather 
than  upon  his  person.  To-day  wealth  is  its  own  guarantee 
for  the  borrowings  used  to  improve  or  to  create  it.  The 
large  debtor  class  to-day  consists  of  the  wealthy  who  have 
the  means  to  guarantee  and  thereby  make  possible  large 
borrowings.  Because  large  indebtedness  yields  large  re- 
turns, the  wealthy  have  become  the  large  debtor  class. 
What  reason  does  a  financier  have  for  putting  a  million  in 
a  business  rather  than  loaning  it  at  the  market  rate  of 
interest?  He  does  it  simply  because  he  anticipates  a 
larger  return  from  an  investment  in  business  than  from  an 
ordinary  loan.  The  excuse  of  a  business  for  being  is  that 
it  pays  more  than  the  loan  market.  If  one  can  borrow 
funds  at  6  per  cent  and  make  them  earn  ten  per  cent  in 
his  business,  it  will  be  wise  to  borrow.  There  is,  of  course, 
a  limit  beyond  which  a  corporation  should  not  extend  its 
borrowings.  It  is  both  common  practice  and  sound  policy 
for  progressive  corporations  to  maintain  debts. 

20.  Issuing  Stocks  and  Bonds. — A  corporation  may  be 
profitable,  enjoying  good- will  and  its  securities  in  demand 
at  the  very  time  when  it  is  approaching  decay.  A  plant 
may  be  ruined  by  a  change  in  demand.  For  instance,  an 
oil  company  recently  came  to  naught  because  the  oil  de- 
posits became  exhausted.  A  lumber  company  failed  when 
by  an  unfavorable  decision  in  court  it  lost  the  title  to  a 
boundary  of  timber;  and  a  brick  plant  was  rendered  worth- 
less when  left  to  one  side  by  a  change  in  the  line  of  trans- 
portation over  which  its  products  moved.  Examples  might 
be  multiplied  of  failures  of  corporations  due  to  new  inven- 


546  Introduction  to  Economics 

tions,  or  processes,  or  fashions,  or  substitutes,  or  exhaus- 
tion of  raw  materials,  or  legal  reverses,  or  manipulations. 

In  any  case  where  danger  threatens  the  future  prosperity 
of  a  corporation  the  management  will  prefer  to  sell  stocks 
rather  than  bonds.  Sell  your  holdings  while  prices  are 
high;  let  the  price  dwindle  in  another's  hands.  Again, 
corporations  find  it  good  policy  not  to  declare  exceptionally 
high  dividends,  for  high  dividends  meet  with  public  dis- 
favor and  frequently  cause  expensive  litigation.  This  may 
be  avoided  by  issuing  more  capital  stock  as  a  stock  divi- 
dend, in  which  no  formal  payment  is  received  by  the  cor- 
poration for  the  stock. 

On  the  other  hand,  one  will  prefer  to  maintain  his  own- 
ership if  a  business  has  promise  of  increasing  returns.  The 
case  would  be  different,  of  course,  should  the  buying  pub- 
lic have  an  exaggerated  estimate  of  the  future  prosperity 
of  a  company.  In  this  case  the  present  price  of  stock 
would  justify  its  sale.  Buying  stock  is  but  buying  future 
incomes,  and  skilful  promoters  may  deceive  the  buying 
public.  Buyers  pay  high  prices  for  stock  at  times  which 
yields  no  returns  at  the  time  of  purchase.  The  anticipated 
future  incomes  discounted  to  their  present  worth  deter- 
mine the  price  of  a  share  of  stock  or  of  any  other  source  of 
income. 

Ordinarily  the  wise  promoter  studies  his  proposition 
intensively  and  has  a  truer  foresight  than  the  buying  pub- 
lic. If  his  estimate  of  future  returns  is  higher  than  that 
of  the  public,  he  will  prefer  to  borrow — issue  bonds — rather 
than  sell  stock.  Bonds  bear  a  fixed  return  and,  therefore, 
usually  sell  higher  than  stock  which  would  yield  an  equally 
large  return.  To  own  bonds  gives  the  holder  no  control  in 
the  management   of   a   company,    therefore   stockholders 


Industrial  Ownership:    The  Corporation     547 

wishing  to  retain  management  will  sell  bonds.  A  com- 
pany will  sell  bonds,  also,  when  the  borrowed  funds  will 
yield  a  larger  return  than  the  interest  paid  on  the  bonds. 

21.  Questionable  Practices. — The  corporation  is  the 
most  important  and  the  most  efficient  form  of  business 
organization,  and  it  is  at  the  same  time  the  most  efficient 
business  device  at  the  disposal  of  rascals.  At  times  corpo- 
rations are  so  intricately  devised  that  individual  responsi- 
bility is  completely  hidden.  Among  the  more  common 
reprehensible  acts  of  corporations  are  the  following: 

(i)  Majority  stockholders  sometimes  elect  themselves  to 
office  and  vote  such  large  salaries  upon  themselves  as  to 
deprive  the  minority  stockholder  of  profits.  This,  where 
permitted,  is  legalized  robbery:  it  is  a  means  whereby  one 
confiscates  the  property  of  another.  It  is  not  less  culpable 
than  the  act  of  a  state  official  who  would  surreptitiously 
appropriate  state  funds. 

(2)  Majority  stockholders  determine  the  buying  of  cor- 
porations, and  this  may  enable  them  to  sell  their  own  prop- 
erty to  the  corporation  at  such  prices  as  they  choose.  For 
instance,  let  us  assume  that  a  prominent  corporate  director 
owns  a  near-by  piece  of  land.  He  may  direct  his  corpora- 
tion to  buy  the  land  at  a  figure  named  by  himself.  Such 
exorbitant  prices  may  leave  no  profits  for  minority  stock- 
holders. This  practice,  it  should  be  added,  is  illegal  both 
in  common  law  and  under  the  Clayton  Act. 

(3)  Another  means  of  defrauding  minority  stockholders 
is  to  form  a  new  company  to  take  over  the  business  of  the 
old  company.  If,  for  instance,  the  managers  of  a  store 
become  well  known,  if  through  honest  dealing  they  acquire 
public  good-will,  they  may  establish  a  new  store  and  carry 
the  trade  with  them. 


548  Introduction  to  Economics 

(4)  The  officers  and  directors  have  the  inside  information 
of  a  corporation  and  can  use  it  to  their  own  private  advan- 
tage. If  they  foresee  a  decline  in  stock  they  can  sell  while 
the  price  is  high,  and  when  the  price  reaches  the  bottom 
they  can  buy  treasury  stock.  If  they  foresee  a  rise  in 
stock  they  may  buy  the  stock  of  minority  stockholders 
and  reap  the  advantages  of  a  rise,  or  if  they  anticipate 
that  the  company  is  approaching  receivership  they  may 
trade  stock  for  notes  held  by  creditors.  These  notes  will 
be  good  because  they  hold  first  lien  against  the  assets  of 
the  company,  whereas  the  stock  may  be  worthless  paper. 
A  partial  remedy  for  such  abuses  is  the  law,  in  New  York 
State  and  other  places,  making  it  illegal  for  a  director  to 
" sell  short." 

(5)  Directors  may  vote  themselves  fees  for  attending 
meetings.  They  may  be  exorbitant,  and  they  represent 
just  so  much  being  subtracted  from  the  stockholders'  divi- 
dends. Probably  the  writers  on  the  subject  make  more 
of  this  abuse  than  is  justified;  it  is  not  unusual,  rather  it  is 
a  common  practice  in  many  corporations,  for  directors  to 
get  a  gold  piece  for  attending  meetings. 

(6)  It  is  not  unusual  for  the  directors  to  juggle  ac- 
counts. If  they  wish  to  boost  the  price  of  stock  they 
may  have  the  profits  revealed  and  the  losses  concealed. 
Where  accounts  are  subject  to  audit,  a  good  showing 
may  be  made  at  the  date  of  the  balance-sheet  by  bor- 
rowing money  which,  as  is  understood  by  private  agree- 
ment, is  to  be  returned  immediately  afterward.  Fake 
sales  may  give  to  slow,  cheap  stock  an  active,  valuable 
appearance.  This  is  a  means  of  speculation  whereby  the 
books  record  large  sales  at  good  prices,  but  in  fact  a  secret 
agreement  is  made  at  the  time  of  sale  to  the  effect  that 
the  stocks  are  to  be  taken  back  within  a  short  time. 


Industrial  Ownership:     The  Corporation     549 

(7)  Unscrupulous  directors  may  inflict  loss  or  even 
bankruptcy  upon  companies  for  whose  management  they 
are  responsible.  This  reduces  the  price  of  stocks  to  a 
minimum,  and  the  controlling  directors  buy  them  up. 
Such  infamy  in  the  past  was  not  an  uncommon  means  of 
defrauding  minority  stockholders. 

(8)  The  last  form  of  manipulation  which  I  shall  mention 
is  the  trick  of  cheating  creditors.  The  lowest  type  of  mer- 
chant is  the  one  who  buys  on  credit,  sells,  pockets  the 
money  and  goes  into  bankruptcy.  A  similar  line  of  action 
is  the  conduct  of  the  most  inferior  class  of  corporate  direc- 
tors, who  borrow  to  the  full  extent  of  their  credit,  split  a 
melon,  allow  the  assets  of  the  company  to  decline,  and  go 
into  bankruptcy.  It  must  be  added  that  such  abuses  are 
very  rare. 

22.  Remedies. — Cunning  rascality  is  fast  becoming  a 
thing  of  the  past  in  business  life.  Lawyers  are  no  longer 
regarded  as  a  "bunch  of  banditti";  downright  fraud  no 
longer  characterizes  the  activities  of  banks  and  stock 
exchanges;  lending  is  not  now  a  game  of  usury.  Sound 
moral  conduct  is  the  prevailing  characteristic  of  modern 
business  activity,  although  there  are  among  us  scoundrels 
who  would  oppress  the  weak,  and  certain  disgraceful  prac- 
tices are  yet  to  be  eradicated.  Many  persons  will  commit 
acts  in  secret  that  they  would  condemn  in  public.  The 
fact  that  men  will  practise  the  highest  order  of  conduct 
when  held  individually  responsible  for  their  acts  makes  it 
imperative  that  we  go  behind  the  legal  person  (corpora- 
tions) and  expose  the  natural  persons,  the  real  perpetrators 
of  unfair  practices.  Inasmuch  as  men  weigh  their  conduct 
when  under  public  opinion,  publicity  is  an  effective  remedy 
for  manipulations.  Cumulative  voting  has  much  promise 
for  good,  because  it  would  give  minority  stockholders  rep- 


550  Introduction  to  Economics 

resentation  in  the  management,  and  minority  stockholders 
would  do  well  to  attend  meetings  and  take  an  active  inter- 
est in  their  corporation.  In  the  corporate  by-laws  there 
should  be  inserted  provisions  as  to  the  salaries  of  officers, 
the  limit  to  which  a  corporation  may  incur  debts,  the 
amount  of  surplus  to  be  set  aside  each  year  and  other  pro- 
visions for  protection.  A  most  effective  guarantee  of  busi- 
ness honor  would  be  for  certified  public  accountants  to 
make  frequent  and  searching  investigations  into  the  con- 
duct of  large  businesses. 

23.  Foresight  in  Business. — To-day  every  part  of  the 
world  is  doing  business  with  every  other  part.  The  enor- 
mous size  of  business  units,  their  complex  relationships 
with  one  another,  and  their  interdependence  impose  social 
and  moral  conditions  which  were  not  in  the  minds  of  men 
prior  to  the  Industrial  Revolution.  Great  factories  employ 
thousands  of  men  for  officers,  clerks,  agents,  and  laborers; 
they  buy  and  sell  on  credit  the  world  over.  Modern  busi- 
ness is  based  on  trust  and  confidence;  these  are  absolute 
essentials  both  in  the  internal  organization  of  single  enter- 
prises and  in  the  business  relationships  of  industries  with 
one  another. 

Since  enterprises  are  organized  for  future  work,  we  must 
have  forethought.  Business  must  be  conducted  by  hon- 
orable and  foresighted  individuals,  or  it  must  be  conducted 
under  governmental  restrictions  and  regulations.  In  the 
very  nature  of  things,  legislators  cannot  be  expected  to 
take  the  far-sighted  view  of  the  higher  type  of  business 
men.  They  feel  the  urgent  pressure  of  consumers  for 
lower  rates  and  prices;  they  have  the  vote-catching  and 
political  rather  than  the  industrial  point  of  view.  They 
too  often  forget  that  high  prices  stimulate  large  crops,  and 


Industrial  Ownership:     The  Corporation     551 

that  paying  rates  make  possible  the  most  efficient  service. 
They  are  capacitated  neither  by  training  nor  position  to 
conduct  industry  intelligently.  Shipping  and  commerce 
under  public  regulation  in  England  during  the  war  is  a 
striking  example  of  bungling  and  waste  at  the  hands  of 
the  inexperienced. 

Reference  so  far  has  been  made  to  the  higher  order  of 
business  men,  but  many  business  men  are  short-sighted, 
are  actuated  by  the  nearness  of  the  reward,  and  are  extor- 
tionate. Fortunately  theirs  is  a  policy  of  self-destruction. 
In  the  Middle  Ages  the  people  thought  that  there  must  be 
public  regulation  of  the  charges  and  services  of  those  who 
produced  common  necessities.  For  instance,  it  was  thought 
that  the  community  was  at  the  mercy  of  a  public  baker, 
and  that  he  could  reduce  the  people  to  penury  through 
starvation  prices.  We  now  reason  that  extortionate  prices 
would  react  upon  the  baker,  reducing  him  to  penury. 
Competition  springs  up  to  reduce  unfair  prices,  and  an 
indignant  community  welcomes  the  newcomers  with  all 
the  trade.  Able  business  men  are  guided  by  considera- 
tions of  public  policy  that  compel  them  to  look  years  and 
even  generations  ahead. 

24.  An  educational  transformation  is  now  in  process.  A 
few  years  ago  business  was  regarded  as  a  game  of  chance 
and  cunning  trickery,  and  a  man's  business  was  looked 
upon  as  "his  own  business."  While  men  were  severely 
trained  for  engineering  and  the  so-called  learned  profes- 
sions, business  training  was  neglected.  A  man  of  no  apti- 
tude for  anything  else  might  go  into  business,  but  to-day 
special  institutions  are  established  to  train  men  and  women 
for  business.  High  schools  and  universities  throughout  the 
country  are  adding  departments  of  business  training,  the 


551  Introduction  to  Economics 

purpose  of  this  training  being  to  give  to  men  and  women 
a  knowledge  of  the  scientific  principles  which  underlie  and 
guide  business  phenomena.  One  mastering  this  training 
becomes  possessed  of  a  public  point  of  view;  he  is  enabled 
to  co-operate  with  the  true  mission  of  the  state,  which 
would  make  private  acquisition  coincide  with  social  pro- 
duction. 

We  have  seen  how  unprincipled  competitors  tend  to 
lower  the  standard  of  competition.  By  paying  low  wages, 
requiring  long  hours  and  by  refusing  to  put  in  safety 
appliances,  they  can  produce  cheaper,  and  undersell  and 
drive  worthy  competitors  from  the  market.  In  self-defense 
worthy  competitors  are  forced  to  the  low  standard  set  by 
the  unworthy.  We  shall  now  see  how  the  unfittest  tend 
to  bring  burdensome  legislation  upon  the  fittest. 

The  people  must  resort  to  legislation  for  protection  against 
corporate  abuses.  It  was  the  short-sighted  and  extortion- 
ate methods  of  certain  railway  officials  which  brought  the 
railroads  under  the  burdensome,  but  necessary,  restrictions 
of  the  Interstate  Commerce  Law  and  succeeding  legislation. 
If  these  laws  put  the  railroads  to  cost  and  inconvenience, 
they  must  be  last  to  complain,  for  why  did  they  unwit- 
tingly force  the  public  to  its  last  resort  for  self-defense? 
They  were  the  least  fit  corporate  directors  whose  unfair 
methods  forced  the  public  to  enact  and  enforce  trust  legis- 
lation. A  wise  policy  rigorously  enforced  on  the  part  of 
business  men  would  have  been  more  lucrative  in  the  long 
run,  would  have  spared  the  necessity  of  burdensome  legis- 
lation, would  have  avoided  much  expensive  litigation,  and, 
above  all,  would  have  given  the  public  trust  and  confi- 
dence rather  than  distrust  and  dislike  for  the  corporate 
industries  of  the  country. 


Industrial  Ownership:     The  Corporation     553 

Sound  business  practice  reaches  beyond  the  internal 
workings  of  an  industry,  for  industries  have  a  public  respon- 
sibility and  must  fit  their  policies  into  the  general  scheme 
of  social  well-being.  Much,  not  all,  state  regulation  is  a 
necessary  evil  and  is  necessitated  by  the  short-sighted  who 
are  ignorant  of  their  own  self-interest.  The  chief  means 
of  hastening  our  educational  process  is  publicity.  We  must 
be  educated  to  a  clear  understanding  of  directors'  responsi- 
bility. Under  the  corporate  form  their  borrowing  power  is 
increased  and  their  personal  liability  is  diminished,  and 
they  are  permitted  to  speculate  with  other  people's  money. 
This  is  a  patent  cause  of  unintelligent  abuse  of  the  corpo- 
rate form.  Increased  power  and  diminished  responsibility 
form  a  dangerous  compound.  While  the  corporate  form 
increases  productive  power,  it  also  increases  acquisitive 
power;  it  is  a  license  for  the  unscrupulous  unless  the  sense 
of  responsibility  is  made  commensurate  with  the  sense  of 
power. 

25.  Exercises. — 1.  The  individual  may  own  real  prop- 
erty, personal  property,  and  the  right  to  do  something  to 
the  exclusion  of  others.  Examples  of  such  rights  are  pat- 
ents, copyrights,  trade-marks,  franchises.  Define  each  of  the 
terms  italicized. 

2.  What  bearing  does  the  safeguarding  of  the  public 
welfare  have  upon  the  limitations  of  private  property? 

3.  What  is  the  object  of  forming  a  partnership?  What 
are  its  chief  characteristics? 

4.  Jones  loans  a  firm — Smith  and  Brown — $10,000  to  be 
invested  in  the  business,  with  the  understanding  that  he  is 
to  receive  one-third  of  the  profits.  Watt  sells  goods  to  the 
firm.  Watt  sues  Jones  as  a  partner  along  with  Smith  and 
Brown.     Is  Jones  liable  to  Watt  ? 

Would  Jones  be  liable  as  a  partner  if  it  were  agreed  that 


554  Introduction  to  Economics 

he  should  receive  6  per  cent  in  any  case  and  15  per  cent  of 
the  profits  ? 

5.  Two  views  of  partnerships:  (a)  A  partnership  has  no 
entity  apart  from  the  persons  who  compose  it,  i.  e.,  a  part- 
nership is  a  band  or  agency  of  individuals  for  convenience 
of  business,  and  so  all  income  from  partnership  operation  ' 
is  individual  income;  (b)  partnership  has  an  entity  as 
distinct  from  the  individuals  who  compose  it  as  if  it  were 
a  corporation. 

Would  a  partnership  have  to  pay  an  income  tax  which 
is  administered  according  to  the  first  view?  the  second 
view?  (Contrast  the  act  of  October  3,  1913,  with  the  act 
of  September  8,  1916,  on  this  point.  At  this  writing  a 
proposed  law  adheres  strictly  to  the  first  view  above  men- 
tioned.) 

6.  How  does  a  joint-stock  association  differ  from  the 
ordinary  partnership?  How  do  they  resemble  partner- 
ships ? 

7.  Paragraph  8  speaks  of  a  corporation  as  an  artificial 
person;  other  terms  might  have  been  used,  as  legal  person, 
legal  entity.     What  is  meant? 

8.  Distinguish  a  share  of  stock  from  a  stock  certificate. 
How  is  stock  transferred? 

9.  Explain  how  directors  are  usually  chosen,  and  enu- 
merate their  powers.  Do  you  favor  cumulative  voting? 
Why  or  why  not  ? 

10.  Who  is  a  stockholder?  What  are  his  rights?  May 
he  have  more  than  one  vote  ?  Does  he  declare  dividends  ? 
If  not,  who  does?     What  is  a  dividend,  and  who  gets  it? 

11.  What  are  the  functions  of  a  receiver?  By  whom  is 
he  employed  ?  What  is  a  receiver's  certificate  ?  Is  it  more 
or  less  desirable  than  a  bond?  (For  answer  see  any  book 
on  corporation  finance.) 

12.  In  raising  funds  under  what  conditions  would  you 
think  it  advisable  to  issue  notes?  bonds?  preferred  stock? 
common  stock? 

13.  Summarize  the  questionable  practices  of  corpora- 
tions that  are  outlined  in  this  chapter.     How  does  the  in- 


Industrial  Ownership:     The  Corporation     555 

creasing  foresight  in  business  (paragraph  23)  tend  to  eradi- 
cate these  practices  ? 

14.  A  corporation  may  be  dissolved  by  the  expiration  of 
the  time  for  which  it  was  chartered,  or  by  the  decree  of  a 
court  for  various  causes  such  as  insolvency,  non-use  of  fran- 
chise, abuse  of  charter  powers,  violation  of  law,  fraudulent 
and  illegal  acts.  The  directors  or  stockholders  may  apply 
for  permission  to  surrender  the  charter  whenever  they 
deem  such  a  course  beneficial  to  the  interests  of  the  stock- 
holders. Upon  dissolution,  after  all  debts  and  claims  are 
paid,  the  remaining  assets  are  divided  among  the  stock- 
holders in  proportion  to  their  holdings.     (Huffcut.) 

(a)  Define  the  italicized  words. 

(b)  Prepare  and  answer  (in  writing)  four  questions  based 
upon  Huffcut's  statement. 


CHAPTER   XXV 
LARGE-SCALE   PRODUCTION  AND   MONOPOLY 

i.  Control  by  best  talent.  2.  Selection  of  men.  3.  Distribution  of 
talent.  4.  Standardization  aids  the  purchaser.  5.  Steady  demand  in  a 
broad  market.  6.  The  quantity  of  demand.  7.  Other  advantages  of  large 
production,  with  or  without  monopoly  power.  8.  The  best  size  of  estab- 
lishment. 9.  Some  advantages  of  monopoly.  10.  Cutthroat  competition. 
11.  Two  types  of  establishments.  12.  Lower  costs  from  costlier  tools.  13. 
The  cost  of  tools  limited  by  saving.  14.  The  competitor.  15.  Factors 
should  reproduce  themselves.  16.  Monopoly  control.  17.  Advertising 
waste.  18.  Salesmanship.  19.  Inequality  of  classes.  20.  Elimination  of 
independent  businesses.  21.  Monopoly  deadens  initiative.  22.  Summary 
and  conclusion.     23.  Conclusion  of  chapter.     24.  Exercises. 

The  student  must  be  on  his  guard  against  confusing 
large  production  with  monopoly.  Some  purely  competi- 
tive concerns  are  far  more  wealthy  and  powerful  than  are 
some  monopolies.  Size  is  not  the  distinguishing  feature 
between  competition  and  monopoly.  But  large  competi- 
tive production  and  monopoly  have  many  of  the  same  ad- 
vantages. 

1.  Control  by  Best  Talent. — The  large  establishment, 
competitive  or  monopolistic,  comes  to  be  directed  by  supe- 
rior talent.  Real  genius  is  rare  in  any  kind  of  activity,  as 
rare  in  business  as  in  letters  or  in  military  leadership.  If, 
in  a  single  line  of  business,  there  are  fifty  individual,  one- 
man  concerns,  all  will  not  be  directed  by  high-grade  talent. 
The  wastes  of  inefficiency  attend  the  self-seeking  activities 
of  the  mediocre.  If,  however,  these  fifty  concerns  are 
united  under  the  control  of  an  able  director,  the  result  will 
be  that  the  labor,  raw  material,  and  machinery  will  be 

556 


Large- Scale  Production  and  Monopoly     551 

effectively  co-ordinated.  Large  production  furnishes  the 
only  means  whereby  the  few  able  generals  of  industry  may 
control.  And  the  wisest  utilization  of  the  agencies  of  pro- 
duction is  the  sole  guarantee  of  the  largest  industrial  out- 
put. 

2.  Selection  of  Men. — Methods  of  precision  characterize 
the  large  industrial  business  or  combination.  A  severe 
system  of  selection  brings  the  trained  intellect  to  the  fore, 
where,  as  in  large  production,  fitness  is  the  test  for  place 
and  ranking.  Men  in  the  ranks  are  watched,  timed,  and 
graded  for  long  periods  of  time.  It  is  to  the  self-interest 
of  the  employer  to  promote  and,  therefore,  hold  the  right 
man.  A  condition  in  which  labor  is  congregated  and  capi- 
tal combined  is  in  sharp  contrast  with  the  condition  where 
one-man  concerns  are  competing.  The  large  and  well- 
managed  establishment  has  a  number  of  departments,  and 
in  the  course  of  his  development  the  young  man  has  an 
opportunity  to  be  tried  out  in  the  several  fields  of  labor. 
One  may  be  a  natural  salesman  and  at  the  same  time  have 
little  or  no  ability  as  a  manager.  Superior  talent  has  its 
limitations,  and  the  large  corporation  furnishes  the  several 
opportunities  in  which  the  young  man  may  be  tested  and 
his  natural  adaptability  discovered.  Under  the  so-called 
Emerson  efficiency  method  of  wage  payment,  if  a  laborer 
is  not  80  per  cent  efficient — mathematically  calculated — he 
is  put  to  another  task.  Only  a  large  business  could  afford 
all  the  preliminary  studies  necessary  to  install  such  a 
system. 

In  early  times  the  father  left  the  control  of  the  business 
to  his  children.  This  succession  was  not  determined  by 
the  fitness  of  the  child.  Again,  it  requires  but  little  capital 
to  start  a  small  business.     The  ease  of  starting  such  an 


558  Introduction  to  Economics 

enterprise  is  an  open  invitation  to  the  unfit,  and,  in  the 
aggregate,  it  means  a  vast  waste  of  productive  capacity. 
It  is  estimated  that  20  per  cent  of  the  personnel  of  the 
small  retail  groceries  changes  each  year.  These  changes 
represent  a  want  of  scientific  knowledge,  a  haphazard  or 
rule-of-thumb  procedure  which  aggregates  enormous  social 
waste. 

Macrosty's  words  are  well  chosen:  "Rule  of  thumb  is 
dead  in  the  workshop;  the  day  is  with  the  engineer  and 
the  chemist  with  their  methods  of  precision;  in  the  count- 
ing-house and  board-room  there  is  no  longer  a  place  for 
the  huckster,  or  gambler;  the  future  is  with  the  commercial 
statesman,  whether  in  a  large  individual  business  or  a 
combination."1 

3.  Distribution  of  Talent. — "The  advantage  of  manage- 
ment by  the  best  talent  is  a  matter  also  of  the  proper  dis- 
tribution of  talent.  Some  man  in  his  independent  estab- 
lishment may  have  been  peculiarly  successful  on  account 
of  his  skill  as  a  salesman;  another,  on  account  of  his  organ- 
izing ability;  a  third,  on  account  of  his  special  technical 
knowledge,  and  so  on.  If  these  various  competing  estab- 
lishments all  unite  into  one,  to  each  man  can  be  given 
the  department  for  which  he  is  peculiarly  adapted,  and  in 
that  way  the  joint  establishment  gets  the  advantage  of 
the  peculiar  skill  of  each."2 

4.  Standardization  Aids  the  Purchaser. — There  are  few 
skilled  buyers;  one  may  have  bargaining  power  and  yet  be 
a  poor  judge  of  quality.  The  good  buyer  must  be  a  judge 
of  men  as  well  as  of  goods;  he  must  be  a  judge  of  the  mar- 
ket in  order  to  anticipate  demand,  and  to  take  advantage 

1  H.  W.  Macrosty,  The  Trust  Movement  in  British  Industry,  p.  337. 
s  Jenks,  The  Trust  Problem,  p.  41. 


Large-Scale  Production  and  Monopoly     559 

of  the  varying  conditions  of  supply.  Able  buyers  com- 
mand large  salaries  because  there  are  so  few  of  them. 
Moreover,  the  knowledge  of  expert  buyers  is  limited  to 
one  or,  at  most,  to  two  or  three  kinds  of  goods.  This 
being  true,  how  can  the  average  consumer  be  guaranteed  a 
wise  purchase  in  our  modern  complex  markets?  A  large 
number  of  small  producers  but  adds  to  his  confusion,  thus 
making  a  purchase  little  more  than  a  gamble.  The  large 
establishment,  however,  standardizes  its  output  and  main- 
tains a  uniformly  good  quality.  Its  trade-mark  gradually 
becomes  a  guarantee  of  quality  and  thus  a  protection  to 
the  unskilled  buyer. 

5.  Steady  Demand  in  a  Broad  Market. — The  large  com- 
bination can  extend  its  business  over  a  broad  territory, 
whereas,  generally  speaking,  the  small  establishment  is 
limited  to  a  smaller  territory.  The  local  concern  is  sub- 
ject to  local  conditions  of  prosperity  or  depression.  But 
the  large  business  covering  a  vast  territory  is  not  neces- 
sarily embarrassed  by  a  local  depression.  The  depression 
in  one  locality  may  be  offset  by  the  prosperity  in  another. 
The  local  demand,  moreover,  is  altogether  seasonal  in 
many  cases.  This  compels  the  local  producer  to  suffer  the 
inconveniences  of  an  irregular  demand.  He  is  confronted 
with  the  problems  of  maintaining  his  labor  supply,  of  stor- 
ing goods  produced  out  of  season,  of  making  satisfactory 
agreements  with  the  suppliers  of  raw  material,  and  of  the 
constant  utilization  of  his  plant. 

A  specific  case  will  reveal  some  of  the  chief  advantages 
of  a  broad  market.  A  dealer  in  lawn-mowers  informs  me 
that  his  company  sells  machines  in  this  country,  Australia, 
Central  and  South  America,  and  in  Europe.  There  is 
always  a  mowing-season  somewhere  within  this  vast  area. 


560  Introduction  to  Economics 

At  those  times  of  the  year,  when  large  orders  are  coming  in 
from  South  America  there  will  be  practically  no  orders  from 
North  America.  Excepting  a  period  of  about  six  weeks, 
orders  will  be  coming  in  from  some  parts  of  the  world. 
During  these  six  weeks  the  plant  is  run  at  full  speed,  and 
the  machines  produced  during  this  period  are  loaded  on 
slow  boats,  which  reach  the  Pacific  Coast  in  time  for  the 
opening  of  the  market  there.  These  slow  shipments  by 
boats  are  less  expensive  than  shipments  by  rail. 

This  broad  market  makes  a  constant  demand;  it  enables 
the  plant  to  run  the  entire  year;  it  avoids  the  necessity  of 
carrying  a  large  idle  stock  for  considerable  portions  of  time. 

6.  The  Quantity  of  Demand. — The  stock  of  a  large  sell- 
ing establishment  which  sells  ioo  units  of  a  particular 
commodity  a  week  may  be  much  less  than  the  aggregate 
stock  of  twenty-five  concerns  whose  combined  sales  are 
ioo  units  a  week.  To  make  this  clear,  let  us  study  the 
variations  of  demand.  First,  demand  varies  with  times 
and  seasons.  Lawn-mowers  are  demanded  in  the  season 
when  the  grass  begins  to  grow,  overcoats  in  the  fall,  and 
straw  hats  in  the  spring.  Second,  demands  are  ephemeral. 
If  the  fashion  leaders  appear  in  russet  shoes,  the  demand 
for  such  shoes  will  begin,  grow  into  a  "craze,"  then  de- 
cline, and  ultimately  die.  A  skilful  buyer  can  fairly  pre- 
dict the  demand  in  such  cases. 

Third,  there  are  chance  variations  of  demand.  One  day 
hair-brushes  are  called  for,  the  next  day  many  tooth- 
brushes, the  third  day  neither.  The  merchant  kills  his  busi- 
ness by  always  being  "just  out"  of  the  particular  good  the 
customer  wants.  The  merchant  must  carry  a  stock  which 
in  variety  and  amount  will  meet  these  chance  variations  of 
demand.     Customers  will  pass  by  a  dozen  small  shops  in 


Large- Scale  Production  and  Monopoly     561 

order  to  trade  with  the  big  store,  because  they  know  that 
they  can  usually  get  what  they  want  in  the  big  store. 

The  small  shop  has  no  basis  for  figuring  these  chance 
variations,  and  must  therefore  carry  a  large  idle  or  reserve 
stock  in  order  to  compete  successfully  with  the  large  store. 
On  the  other  hand,  the  store  which  is  making  a  large  vol- 
ume of  sales  can  closely  approximate  these  chance  varia- 
tions. The  larger  the  number  of  individual  sales  the 
greater  is  the  tendency  to  maintain  a  constant  daily  mean 
or  average  number  of  sales.  It  has  been  calculated  that 
if  a  large  store  sells  64  times  as  many  goods  as  a  small 
store,  it  will  have  to  carry  a  stock  not  64  times  as  large, 
but  only  8  times  as  large.  Now,  since  it  sells  64  times  as 
many  goods  and  carries  a  stock  only  8  times  as  large,  the 
stock  charge  on  a  single  article  will  be  only  one-eighth  as 
much  in  the  large  as  in  the  small  store.  If  one  merchant 
supplies  a  town  he  will  have  to  carry  but  one-eighth  as 
many  goods  as  would  64  competing  merchants.1 

7.  Other  advantages  of  large  production,  with  or  without 
monopoly  power,  may  be  expressed  in  the  following  sum- 
mary form: 

(a)  For  the  handling  of  massive  materials  the  large  con- 
cern is  equipped  with  the  best  facilities. 

(b)  The  large  concern  enjoys  the  full  advantages  of  a 

1  It  is  said  in  Professor  Ely's  Monopolies  and  Trusts  that  "The  mathe- 
matical theory  of  probability  teaches  that  the  larger  the  number  of  indi- 
vidual variations  around  an  underlying  mean,  the  greater  the  tendency 
of  these  variations  to  give  a  steady  value  of  that  mean.  Those  running 
over  tend  more  and  more  to  balance  those  running  under;  and,  according 
to  the  theory,  the  mean  of  a  number  of  variations  differs  from  the  true  under- 
lying mean  by  a  quantity  varying  inversely  as  the  square  root  of  the  total 
number  of  variations."  See  Merriman,  Text-Book  of  Least  Squares,  p.  89, 
or  any  other  work  on  the  subject.  The  above  examples  are  fonnd  in  Dr. 
Ely's  book. 


56LZ  Introduction  to  Economics 

division  of  labor,  of  separate  departments,  and  it  can  buy 
the  very  best  machinery. 

(c)  The  large  factory  saves  by-products.  Cottonseed  is  a 
by-product  of  cotton  fibre;  hide,  bone,  and  fats  are  by- 
products of  meat.  Under  the  old  hand-processes  it  did 
not  pay  to  save  cottonseed,  but  under  new  processes  it 
is  accumulated  in  large  quantities  and  converted  into 
valuable  products. 

(d)  The  Standard  Oil  Company  maintains  an  experiment 
station  in  which  there  are  made  chemical  investigations  of 
the  most  elaborate  and  extensive  kind.  In  fact,  a  regular 
investigating  department  is  devoted  to  the  problem  of 
fully  utilizing  all  the  elements  of  crude  oil.  As  a  conse- 
quence, that  company  has  in  the  market  over  three 
hundred  by-products.  Many  of  these  valuable  products 
are  made  from  parts  of  the  oil  which  would  have  been 
thrown  away  by  a  small  plant.  A  large  automobile  con- 
cern is  reported  to  have  set  aside  $3,000,000  with  which 
to  perfect  a  tractor.  No  small  company  could  do  this. 
There  are  numerous  social  and  industrial  needs  which  can 
be  served  only  by  large  capital. 

(e)  Small  concerns  suffer  more  from  bad  debts  than  do 
large  concerns,  especially  those  with  some  monopoly 
power.  Keen  competition  causes  a  rather  liberal  exten- 
sion of  credit.  When  the  American  Steel  and  Wire  Com- 
pany was  formed  the  loss  from  bad  debts  for  the  constitu- 
ent companies  was  reduced  from  y3  of  1  per  cent  to  %>  of  1 
per  cent. 

(/)  Cross-freights  often  aggregate  a  large  total  loss  for 
a  number  of  competing  companies.  In  a  large  country 
like  this  freight  rates  are  significant  items  in  the  sale  of 
goods.     If  an  oil-refining  company  in  New  Jersey  supplies 


Large- Scale  Production  and  Monopoly     563 

customers  in  Illinois,  while  a  refinery  near  Chicago  supplies 
customers  in  New  Jersey,  there  must  be  large  and  unneces- 
sary freight  costs.  Should  these  companies  combine  under 
one  management  freights  would  be  saved  because  customers 
would  be  supplied  from  the  nearest  refinery.  It  is  esti- 
mated that  $500,000  was  saved  annually  in  cross-freights 
by  the  formation  of  the  American  Steel  and  Wire  Com- 
pany. 

(g)  Cross-deliveries  in  cities  are  no  less  wasteful  than  are 
cross-freights.  The  following  statement  may  be  far  from 
accurate,  but  it  is  suggestive.  These  figures  were  dis- 
played in  191 2  at  a  national  dairy  show  at  Chicago.  It 
represents  the  actual  wastes  of  the  present  distribution  of 
milk  in  an  American  city. 

Present  System  An  Efficient  System 

173  distributors,  requiring  the  ser-  A  simple  efficient  agency  could  ren- 
vices  of:  der  superior  service  with: 

356  men  and  many  families.  90  men. 

360  horses.  50  horses. 

305  milk- wagons.  25  horse-drawn  trucks  and  6  motor- 
trucks. 

2,509    miles    of    delivering     62,300 

quarts  to  45,000  homes.  300  miles  travel. 

$76,600  invested  in  milk-room  equip- 
ment. $75,000  equipment  of  one  sanitary 

milk-depot. 

$108,800  invested  in  horses  and  wag- 
ons; $282,500  total  investment.  $100,000  building  and  real  estate. 

$2,000  daily  cost  of  distribution.  $600  daily  cost  of  distribution. 

$720,000  total  yearly  cost.  $220,000  yearly  cost  of  distribution. 

Resulting  economies;  better  service,  purer  milk,  $500,000 
saving  a  year,  or  over  66^  per  cent.1 

(h)  The  capacity  of  a  number  of  competitors  often  excels 
the  needs  for  the  output.     Prior  to  the  formation  of  the 

1  This  example  taken  from  Materials  for  the  Study  of  Elementary  Eco- 
nomics (p.  911)  by  Marshal,  Wright  and  Field.    Chicago  University  Press. 


564  Introduction  to  Ecojiomics 

Whiskey  Trust  the  distillers  had  probably  60  per  cent 
more  capacity  than  the  market  required.  When  the  trust 
was  formed  it  closed  a  number  of  the  weaker  distilleries 
and  ran  the  more  efficient  ones  constantly.  This  tended 
to  make  the  business  more  steady,  to  keep  the  labor  em- 
ployed, and  to  enable  the  idle  distilleries  to  be  transferred 
to  other  lines  of  employment. 

(i)  The  formation  of  agencies  to  sell  the  output  of  a  num- 
ber of  companies  may  frequently  result  in  large  savings. 
For  instance,  there  are  a  large  number  of  small  competing 
coal  companies  in  Indiana.  "The  Indiana  coals,"  says 
President  Van  Hise,  "are  of  a  kind  that  deteriorate  rapidly 
when  taken  out  of  the  mine.  Several  varieties  and  sizes 
of  coal  are  produced;  to  obtain  one  size,  other  sizes  must 
be  made.  If  an  order  comes  to  a  mine  for  a  certain  size, 
corresponding  orders  may  not  come  for  the  other  sizes,  but 
such  orders  may  come  to  an  adjacent  mine.  If  a  group  of 
mines  may  co-operate  so  that  the  orders  will  equalize  them- 
selves among  the  different  varieties  and  sizes  of  coal,  it  is 
evident  the  waste  will  be  greatly  reduced."1 

8.  The  Best  Size  of  Establishment. — All  of  the  above 
advantages,  which  have  been  alleged  by  different  scholars 
in  favor  of  combination,  may  be  enjoyed  by  the  large  com- 
petitor as  well  as  by  the  monopoly.  The  large  competitive 
establishment  may  be  manned  by  superior  talent,  and  do 
business  throughout  an  extended  market.  The  large  com- 
petitive establishment  has  a  demand,  is  equipped  with  the 
best  facilities,  enjoys  a  division  of  labor,  saves  by-products, 
and  maintains  an  investigating  department.  It  can  so 
locate  its  plants  as  to  save  in  cross-freights,  and  it  can 
adjust  its  capacity  to  its  market. 

1  Concentration  and  Control,  p.  92. 


Large-Scale  Production  and  Monopoly     565 

We  might  enumerate  arguments  pro  and  con  on  the 
question  of  the  best  size  of  establishments.  But  the  whole 
argument  briefly  and  accurately  summarizes  itself  in  this: 
there  is  but  one  best  adjustment  of  means  to  the  end  of  the 
greatest  net  return.  This  best  adjustment  would  not  con- 
tain relatively  short  or  long  factors;  it  would  not  have  too 
much  building  for  the  machinery,  or  fewer  laborers  than 
the  machinery  demanded.  It  would  have  neither  a  short- 
age nor  an  oversupply  of  raw  materials  or  managerial 
ability.  There  would  be  a  proper  proportionality  of  all 
the  factors  to  one  another  throughout  the  establishment. 
This  is  but  half  of  the  story  and  the  other  half  is  that  the 
establishment  must  be  properly  adjusted  to  the  extent  of 
the  market. 

9.  Some  Advantages  of  Monopoly. — Apart  from  the 
problems  of  size  and  proportionality  there  are  certain  con- 
siderations which  seem  to  favor  monopoly.  A  brief  sur- 
vey of  the  arguments  for  and  against  monopoly  will  follow. 
Among  the  advantages  of  monopoly  now  to  be  considered 
are:  the  elimination  of  cutthroat  competition,  the  saving 
of  invested  capital  through  a  proper  installation  of  im- 
provements, the  reduction  of  the  costs  of  advertising  and 
selling. 

10.  Cutthroat  Competition. — Assume  a  number,  say  ten, 
of  competitors  who  are  producing  a  commodity  the  cost  per 
unit  of  which  diminishes  as  the  volume  of  output  increases. 
It  will  most  certainly  be  to  the  advantage  of  each  competi- 
tor to  broaden  his  market  and  increase  the  number  of  his 
sales  in  order  that  he  may  increase  his  production.  By 
enlarging  his  production,  the  cost  per  unit  of  output  dimin- 
ishes, and.  if  fortune  favors  him,  he  can  undersell  and  drive 
his  competitors  from  the  market.     Obviously  each  com- 


566  Introduction  to  Economics 

petitor  will  desire  to  be  the  largest  producer  and  will, 
therefore,  lower  his  price  in  order  to  take  the  market. 
From  the  fact  that  each  concern  desires  to  be  the  largest, 
it  follows  that  the  total  productive  capacity  of  the  ten 
concerns  above  assumed  outgrows  the  total  demand  of 
the  market  for  their  product.  Cutthroat  competition  be- 
tween these  producers  will  tend  to  destroy  the  gains  for 
each  and  all.  This,  moreover,  means  a  large  social  waste, 
for  when  productive  capacity  overreaches  the  demand  the 
several  plants  must  be  idle  a  considerable  portion  of  the 
time.  These  competitors  will  sooner  or  later  deem  it  wise 
to  form  a  combination  to  regulate  prices  and  to  restrict  the 
output  in  the  interest  of  all.  Thus  it  is  seen  how  cutthroat 
competition  results  in  combination  and  monopoly. 

ii.  Two  Types  of  Establishments. — Productive  estab- 
lishments may  be  divided  into  two  classes  with  respect  to 
overhead  costs.  A  railroad  is  typical  of  one  class.  It 
must  have  large  invested  capital  in  the  form  of  rights  of 
way,  road-bed,  stations,  terminals,  and  the  like.  It  must 
have  these  facilities  whether  the  traffic  be  light  or  heavy, 
whether  it  transports  a  thousand  or  a  hundred  thousand 
car-loads  of  goods.  Once  the  equipment  is  provided,  the 
particular  or  special  cost  of  transporting  an  additional 
passenger  or  commodity  to  a  certain  point  is  negligible. 
General  costs  or  overhead  charges  are  very  high  in  com- 
parison with  particular  costs.  There  are  many  industries 
in  which  overhead  charges  are  very  high  in  comparison 
with  particular  costs.  Some  of  them  are:  iron  and  steel 
blast-furnaces,  beet-sugar,  cement,  paper  and  wood  pulp. 

In  other  industries  particular  costs  are  high  in  compari- 
son with  overhead  charges.  The  making  of  millinery  and 
lace  goods  is  largely  a  matter  of  individual  skill,  and  does 


Large-Scale  Production  and  Monopoly     567 

not  require  a  heavy  investment  of  fixed  capital.  Clothing, 
signs,  and  advertising  novelties,  some  kinds  of  printing  and 
publishing  are  exemplary  of  this  class. 

Industries  in  the  latter  class  can  adopt  new  improve- 
ments with  comparatively  little  inconvenience  or,  generally 
speaking,  they  may  turn  to  a  new  and  different  line  of 
business  without  material  sacrifice.  If  the  opening  up  of 
a  new  car-line  eats  too  heavily  into  his  profits,  the  owner 
of  a  line  of  jitney-buses  can  either  select  a  new  line  or, 
through  trade,  convert  his  property  into  the  form  of  a 
grocery-store.  But  the  case  is  entirely  different  where  the 
investment  is  largely  in  the  form  of  fixed  capital  which 
could  be  used  in  no  other  capacity. 

12.  Lower  Costs  from  Costlier  Tools. — The  rapidity  with 
which  mechanical  inventions  follow  one  another  is  amaz- 
ing. Valuable  machinery  may  become  obsolescent  over  a 
week's  end.  At  any  time  important  changes  are  apt  to 
arise,  the  installation  of  which  would  work  general  revi- 
sion throughout  a  factory.  Should  each  producer  be 
ready  on  a  moment's  notice  to  act  with  fearless  vigor 
in  scrapping  the  old  and  substituting  the  latest  improve- 
ments, even  though  such  change  would  render  the  pre- 
vious investment  worthless? 

One's  self-interest  calls  for  the  largest  net  gain.  But 
the  conditions  for  acquiring  net  gain  vary  with  the  change 
of  circumstances.  If  land  advances  in  price  and  wages 
double,  the  high  cost  of  these  factors  will  not  justify  the 
farmer  in  maintaining  cheap  or  obsolescent  tools.  In 
keeping  with  the  law  of  proportionality,  he  should  scrap 
the  old  and  stock  up  with  superior  tools,  for  when  his  tools 
are  ineffective  he  must  employ  more  of  costly  labor  and 
use  more  of  high-priced  land  to  produce  a  given  crop.     To 


568  Introduction  to  Economics 

retain  a  tool  or  machine  in  use  oftentimes  proves  to  be  far 
more  costly  than  the  original  purchase-price  of  such  agent. 
The  cost  of  a  superior  tool  may  be  far  more  than  offset  by 
the  saving  in  wages  and  land  rent. 

13.  The  Cost  of  Tools  Limited  by  Saving. — But  the 
extra  cost  for  tools  must  not  exceed  the  saving  in  rent  and 
wages.  You  lose  if  the  cost  for  improved  tools  is  $500, 
while  the  saving  in  rent  and  wages  is  only  $400.  Indus- 
tries with  large  fixed  capital  must  make  sure  that  addi- 
tional earnings  will  be  large  before  the  old  is  scrapped  and 
the  new  installed. 

If  your  plant  represents  a  fixed  capital  of  $10,000  whose 
annual  earnings  amount  to  $500,  the  complete  installation 
of  improved  machinery,  costing,  say,  $10,000,  will  destroy 
the  old  plant,  let  us  assume,  as  if  a  fire  had  levelled  it  to 
the  ground.  No  argument  is  needed  to  show  that  your 
loss  in  the  form  of  the  old  plant  is  $10,000.  Would  the 
new  installation  pay  ? 

The  loss  in  the  form  of  the  old  plant  of  $10,000,  together 
with  the  cost  of  the  new,  represents  a  total  of  $20,000.  It 
would  pay  to  make  the  new  installation  only  upon  the 
condition  that  it  would  yield  a  return  that,  at  least,  would 
be  capitalized  at  $20,000. 

14.  The  Competitor. — Assume  now  that  a  competitor 
enters  the  field,  and  that  his  plant  is  stocked  with  the  new- 
est and  best.  Although  his  plant  represents  a  fixed  capital 
of,  say,  only  $10,000,  yet  the  improvements  are  such  that 
he  can  displace  you  as  effectively  as  the  new  machine  for- 
merly displaced  the  old  cobbler.  Does  your  ruin  mean  a 
social  gain  ?     If  so,  it  is  well. 

Against  the  notion  that  your  ruin  is  but  an  incident  in 
social  gain,  you  would  perchance  urge  two  points:  (a)  The 


Large-Scale  Production  and  Monopoly     569 

first  effect  of  the  new  investment  is  to  destroy  $10,000  in 
the  form  of  the  existing  plant;  and  (b)  the  second  effect  is 
that  it  destroys  a  potential  $10,000  industry  in  another 
field  of  production.  You  will  urge,  and  rightly  so,  that 
the  test  of  social  gain  is  met  only  when  the  new  plant 
earns  a  return  sufficient  to  justify  a  cost  of  $20,000. 

15.  Factors  Should  Reproduce  Themselves. — A  paying 
factory  reproduces  itself.  Its  parts  gradually  wear  out 
and  are  replaced  by  the  newest  and  best.  Such  replace- 
ments, however,  are  paid  out  of  the  proceeds  of  the  past 
set  aside.  We  say,  for  instance,  that  each  item  of  the  mer- 
chant's stock  must  normally  sell  at  a  price  which  will 
replace  that  item  with  one  of  equal  price,  together  with  a 
surplus  sufficient  to  cover  all  the  costs  of  selling  it,  and 
which  will  make  some  contribution  to  the  expense  of  keep- 
ing up  the  building.  Any  item  failing  to  do  this  is  carried 
at  a  loss;  and  the  merchant  who  continues  to  carry  items 
at  a  loss  will  see  his  stock  diminish  and  ultimately  dis- 
appear. Likewise,  a  manufacturing  plant  gradually  dimin- 
ishes in  worth  unless  the  items  composing  it  produce  a 
sum  sufficiently  large  to  enable  the  owner  to  purchase 
another  item  of  the  same  character,  which  in  turn  will 
produce  enough  to  install  its  successor.  The  factory's 
equipment  of  this  year,  so  to  speak,  is  the  offspring  of 
last  year's  equipment,  now  largely  destroyed.  Next  year's 
equipment  will  be  the  result  of  present  equipment. 

Upon  applying  this  reasoning  to  a  manufacturing  plant 
in  which  heavy  fixed  capital  is  involved,  it  will  follow  that 
in  many  cases  sudden  changes  will  involve  heavy  social 
losses.  The  maximum  social  gain  requires  that  the  mate- 
rial changes  be  slow  enough,  in  most  cases,  to  enable  the 
enterprise  to  get  the  chief  utilities  out  of  fixed  capital. 


570  Introduction  to  Economics 

But  a  competitor  is  encouraged  to  install  the  new,  and,  if 
possible,  to  drive  existing  plants  out  of  business.  Personal 
gains  are  made  oftentimes  at  the  expense  of  existing  plants 
and  also  at  a  loss  to  society. 

1 6.  Monopoly  Control. — The  purpose  of  a  monopoly  is 
to  secure  the  largest  net  gain.  Ordinarily,  a  monopoly 
would  utilize  a  machine  until  wear  and  tear  would  make  it 
advisable  to  secure  a  new  one,  at  which  time  it  would  put 
in  the  most  up-to-date  machine.  But  if  the  transaction 
should  promise  a  net  gain,  the  self-interest  of  the  monopo- 
list should  at  any  time  cause  him  to  scrap  machinery, 
replacing  it  by  the  newest  and  best.  If  on  Monday  morn- 
ing he  installs  a  machine  costing  $10,000,  his  self-interest 
would  make  it  advisable  for  him  to  scrap  it  on  Tuesday 
morning  for  an  improved  machine,  if  such  would  yield  him 
a  net  return  on  the  total  cost.  In  other  words,  the  mo- 
nopolist would  find  it  fitting  and  proper  to  do  what  society 
ought  to  do — introduce  improvements  upon  the  principle 
of  net  gain.  Society  is  fast  coming  to  recognize  the  advisa- 
bility of  monopolies,  un4er  public  control,  with  respect  to 
railroads.  This  is  true  because  competition  is  more  waste- 
ful, and  all  but  impossible  among  railroads,  because  of  the 
large  overhead  costs  as  compared  with  particular  costs. 
Upon  precisely  the  same  grounds  we  should  reason  with 
respect  to  certain  other  industries  with  large  fixed  capital. 

17.  Advertising  Waste. — It  is  estimated  that  the  annual 
outlay  for  advertising  amounts  to  over  $1,000,000,000  in 
the  United  States.  Probably  the  larger  part  of  this  huge 
sum  may  be  counted  as  social  waste  and  this  is  a  waste  of 
competition.  On  the  other  hand,  much  advertising  is 
socially  productive.  Consumers  are  taught  through  ad- 
vertising to  know  the  variety,  quality,  and  relative  merits 


Large- Scale  Production  and  Monopoly     571 

of  goods,  to  know  the  most  effective  uses  to  which  they 
may  be  put.  It  stimulates  desire  to  acquire  the  best,  thus 
bringing  about  the  introduction  of  modern  improvements. 
Within  recent  years  advertising  has  largely  eliminated  the 
drudgery  of  the  housewives.  It  has  put  the  washing- 
machine  in  the  place  of  the  washboard,  has  substituted 
the  vacuum  cleaner  for  the  scrub-broom,  the  electric  iron 
for  the  fiat-iron,  and  the  tireless  cooker  and  gas  range  for 
the  coal  and  wood  stove.  Such  advertising  is  educational; 
it  raises  the  standard  of  living. 

Advertising  that  is  merely  acquisitive  is  social  waste. 
If  a  $10,000  soap  advertisement  but  supports  the  extrava- 
gant claim  of  a  competitor;  if  it  is  designed  merely  to  solicit 
trade  from  a  competitor,  it  must  be  classed  as  social  waste. 
The  individual  may  thus  increase  his  sales,  but  at  the 
expense  of  another.  There  is  a  fairly  well-defined  limit 
to  the  amount  of  soap  used;  if  an  alluring  advertisement 
of  Pears's  causes  a  larger  sale  of  that  brand,  it  will  mean  a 
smaller  sale  of  other  brands.  Society  is  a  loser  when  the 
wealth  within  it  is  so  utilized  as  to  fatten  one's  purse  at 
the  expense  of  another's. 

The  literature  on  advertising  argues  that  competitive 
advertising  more  than  pays  for  itself.  Such  advertising, 
it  is  said,  creates  a  large  demand,  thus  securing  to  the 
manufacturer  the  advantages  of  large  orders  and  thereby 
fosters  large  production,  which  enables  him  to  lower  his 
price.  This  claim  is  groundless  in  the  case  of  merely 
acquisitive  advertising.  Purely  acquisitive  advertising — 
advertising  that  does  not  educate  or  enhance  the  volume 
of  sales  of,  say,  soap — enters  into  the  price  of  the  product 
and  is  paid  by  the  final  consumer. 

There  is  an  elastic  limit  to  the  amount  which  the  pur- 


572  Introduction  to  Economics 

chaser  can  spend  for  the  different  classes  of  goods.  And 
the  effect  of  the  competitive  appeals  is  not  necessarily  to 
increase  the  amount  of  business  along  a  particular  line; 
rather  it  has  the  effect  of  destroying  the  appeal  of  other 
competitors.  This  writer  recently  asked  an  advertising 
manager  his  reason  for  inserting  an  expensive  page  adver- 
tisement in  a  prominent  journal.  His  response  was:  "Did 
you  note  that  my  ad  was  directly  opposite  the  page  ad  of 
our  competitor?"  When  I  answered  in  the  affirmative  he 
continued:  "Well,  I  simply  put  it  in  there  to  kill  the  effect 
of  his."  The  purpose  and  effect  of  much  advertising  is  of 
this  negative  wasteful  nature. 

In  most  instances  large  competitive  concerns  enjoy  the 
same  economies  as  do  monopolies,  but  this  is  not  true  in 
case  of  competitive  advertising.  Advertising  wastes  are 
most  pronounced  in  the  selling  campaigns  of  large  compet- 
ing interests.  Monopoly  control  would  have  the  effect  of 
destroying  advertising  waste  and  of  maintaining  such  ad- 
vertising as  would  teach  the  public  regarding  the  merits 
and  uses  of  goods.  Its  expensive  advertising  might  be 
used,  as  in  the  case  of  oil  and  tobacco,  to  build  up  a  new 
foreign  market,  whereas  under  competition  such  expendi- 
tures too  often  partake  of  the  nature  of  a  cutthroat  scram- 
ble for  the  local  market. 

18.  Salesmanship. — Much  that  has  been  said  on  adver- 
tising will  apply  to  salesmanship.  Salesmen  with  the  gift 
of  personality  and  persuasive  powers  are  rare  and  expen- 
sive. Two  salesmen  may  be  handling  equal  lines  of  goods. 
They  may  work  equally  hard,  meet  the  same  number  and 
class  of  customers,  yet  the  one  may  take  the  sales  from 
the  other.  Competing  manufacturers  know  the  advan- 
tage  of  personality  in   salesmen.     Each   concern   desires 


Large- Scale  Production  and  Monopoly     573 

salesmen  who  can  most  effectively  demonstrate  its  goods 
to  retail  merchants  and  other  distributors,  who  can  please 
these  customers  by  advising  them  as  to  the  selection  of 
goods,  the  amount  to  be  carried,  and  as  to  the  best  method 
of  exhibiting  and  handling  the  goods.  In  short,  each  com- 
peting manufacturer  wants  salesmen  who  can  take  the 
trade  from  the  other  competing  firms,  and  who  can  tie  the 
customers  up  with  the  manufacturer  they  represent. 

These  rare  and  skilful  salesmen  learn  to  look  out  for 
themselves.  The  fact  is,  they  tend  at  times  to  tie  the 
customers  to  themselves  rather  than  to  the  firms  they 
represent.  The  customers  learn  to  trust  such  men,  are 
glad  to  see  them  come,  are  pleased  to  have  their  advice  on 
what  to  carry,  how  to  sell  it,  how  to  meet  new  styles  and 
changing  conditions.  The  good  salesman  never  abuses  the 
confidence  of  his  customers,  never  oversells  a  small  mer- 
chant and  always  has  the  "you"  point  of  view  when  in 
their  stores.  While  all  this  may  seem  excellent  for  the 
manufacturer  represented,  it  may  be,  and  often  is,  dan- 
gerous for  him.  Such  a  salesman  will  ask  an  exorbitant 
salary  and  his  firm  is  all  but  compelled  to  pay  it,  and 
cheerfully  at  that,  for  his  grasp  of  the  market  is  known  to 
competing  manufacturers,  who  will  gladly  pay  him  a  high 
salary.  To  hire  him  would  be  to  secure  his  services,  mean- 
while buying  the  market  which  he  controls. 

With  the  formation  of  a  monopoly,  however,  there  is 
but  one  source  of  supply,  and  the  expensive  salesman  is  no 
longer  needed  for  competitive  purposes.  "Work  is  organ- 
ized," to  quote  President  Van  Hise,  "so  that  a  travelling 
salesman  or  agent  does  the  work  in  a  given  community 
for  a  large  concern  instead  of  several  for  the  different  plants 
of  that  concern.     When  the  American  Steel  Hoop  and  Iron 


574  Introduction  to  Economics 

Company  was  formed,  about  two  hundred  salesmen  were 
discharged."  l 

The  remainder  of  this  chapter  will  consider  some  evils 
or  disadvantages  of  monopoly. 

19.  Inequality  of  Classes. — It  is  an  unfortunate  state  of 
affairs  where  the  few  opulently  rich  are  standing  upon  the 
substratum  of  general  poverty;  such  is  not  consistent  with 
democracy.  Privately  owned  monopoly  power  and  the 
universal  franchise  are  not  companionable.  The  majority 
vote  determines  who  pays  the  taxes  and  finances  public 
works.  If  I  am  poor  and  you  are  rich,  I  should  vote  for 
a  high  tax  on  you  and  a  light  tax  on  myself.  If  you  have 
a  monopoly  which  oppresses  me,  charges  me  a  high  price 
and  kills  my  chances  for  competition,  do  you  expect  me  to 
vote  to  sustain  your  power  ? 

The  house  of  want  becomes  jealous  and  suspicious  of 
the  house  of  have.  This  jealousy  and  suspicion  grow  into 
envy  and  ultimately  into  open  conflict.  The  rule  of  the 
czar  must  ultimately  succumb  to  the  rule  of  the  people. 
Men  naturally  hope  for  the  destruction  of  that  which  they 
fear,  and  they  fear  the  giant  monopoly. 

Professor  T.  N.  Carver  uses  this  homely  though  most 
fitting  illustration:  "I  will  take  the  common  house  cat, 
whose  diminutive  size  makes  her  a  safe  inmate  of  our 
household,  in  spite  of  her  playful  disposition  and  her  lik- 
ing for  animal  food.  If,  without  the  slightest  change  of 
character  or  disposition,  she  were  suddenly  enlarged  to 
the  dimensions  of  a  tiger,  we  should  at  least  wrant  her  to 
be  muzzled  and  to  have  her  claws  trimmed,  whereas  if  she 
were  to  assume  the  dimensions  of  a  mastodon,  I  doubt  if 
any  of  us  would  want  to  live  in  the  same  house  with  her. 

1  Concentration  and  Control,  p.  14. 


Large- Scale  Production  and  Monopoly     515 

And  it  would  be  useless  to  argue  that  her  nature  had  not 
changed,  that  she  was  just  as  amiable  as  ever,  and  no 
more  carnivorous  than  she  always  had  been.  Nor  would 
it  convince  us  to  be  told  that  her  productivity  had  greatly 
increased  and  that  she  could  now  catch  more  mice  in  a 
minute  than  she  formerly  could  in  a  week.  We  should  be 
afraid  lest,  in  a  playful  mood,  she  might  set  a  paw  upon 
us,  to  the  detriment  of  our  epidermis,  or  that  in  her  large- 
scale  mouse-catching  she  might  not  always  discriminate 
between  us  and  mice."  l 

20.  Elimination  of  Independent  Businesses. — From  earli- 
est times  the  term  odious  has  been  applied  to  monopoly, 
the  reason  being  that  monopoly  deadens  incentive,  de- 
stroys independent  businesses,  and  by  means  of  artificial 
scarcity  works  personal  extortion.  Artificial  scarcity  is  as 
effective  in  cutting  short  your  rations  as  is  a  fire,  famine, 
or  pestilence. 

In  any  industry  the  effect  of  monopoly  is  to  make  a 
small  class  of  employers  and  a  large  class  of  hired  workers. 
Independent  concerns  are  eliminated.  Absolute  private 
monopoly  would  be  industrial  despotism.  There  may  be 
"good  trusts"  and  "bad  trusts,"  as  in  government  there 
may  be  good  despots  and  bad  despots,  but  the  point  is 
that  we  don't  want  the  despot.  Broad  powers  are  not  to 
be  trusted  to  individual  hands.  Such  is  human  cupidity 
that  the  results  are  contrary  to  social  welfare  when  private 
parties  have  the  opportunity  to  aggrandize  themselves  at 
the  expense  of  others.  The  temptation  is  too  great  when 
individuals  are  at  liberty  to  vote  the  public's  money  into 
private  pockets.  The  point  is  frequently  made  that  mo- 
nopolies have  in  many  cases  actually  lowered  prices.     This 

1  Essays  in  Social  Justice,  p.  332. 


576  Introduction  to  Economics 

is  not  denied,  nor  is  it  claimed  that  all  such  reductions  of 
price  are  intended  to  crush  competition.  The  decisive 
point  is  that  it  rests  on  the  discretion  of  the  monopoly  to 
gouge  the  consumer  at  will.  A  well-ordered  democracy 
demands  a  wide  distribution  of  ownership  and  responsi- 
bility. The  problem  of  ownership  is  more  than  a  mere 
matter  of  efficiency  and  price.  It  is  a  problem  of  an  in- 
creased sense  of  individual  responsibility  which  is  best 
secured  by  increasing  the  numbers  engaged  in  independent 
pursuits.  A  Wide  distribution  of  ownership  causes  a  bet- 
ter distribution  of  wealth,  and  thereby  reduces  pauperism 
and  crime. 

It  is  claimed  that  monopolies  eliminate  private  concerns 
by  means  of  bargaining  power — the  power  to  exact  unfair 
prices — rather  than  by  superior  productive  efficiency. 
There  are  a  few  monopoh'es  caused  solely  by  a  government 
grant  or  a  limited  natural  resource,  but  in  the  main  the 
monopoly  problem  is  a  question  of  advantage  in  trading. 
Intelligent  efforts  to  equalize  bargaining  power  will  take 
care  of  the  monopoly  problem.  Recent  legislation  recog- 
nizes that  common  carriers  are  monopolies  with  such  bar- 
gaining power  that  they  can  exact  unfair  rates.  This 
recognition  has  led  to  rate  control.  Also,  it  has  declared 
against  combinations  in  restraint  of  competition. 

21.  Monopoly  Deadens  Initiative. — To  paralyze  incen- 
tive is  to  deaden  and  demoralize  industry!  It  must  be 
admitted  that  unbridled  competition  is  wasteful,  and  that 
it  may  go  to  the  extreme  of  industrial  anarchy.  General 
Walker's  example  of  the  burning  theatre1  furnishes  a  fit- 
ting illustration  of  this.  He  says:  The  destruction  of  life 
occasioned  by  the  mad  competitive  rush  for  an  exit  from  a 

1  Political  Economy  (advanced  course),  p.  267. 


Large-Scale  Production  and  Monopoly     577 

burning  theatre  is  a  vivid  case  of  the  waste  of  unbridled 
competition.  And  the  saving  of  life  caused  by  the  exit  of 
the  crowd  under  the  regulation  of  a  well-ordered  police 
force  is  a  forceful  example  of  the  need  for  regulation. 
Discipline  can  cause  no  force,  but  it  can  save  much  waste. 
As  between  unbridled  competition  and  monopoly,  give  us 
the  latter.  At  best,  there  will  be  wastes  in  any  human  sys- 
tem, but  the  wastes  under  regulated  competition  are  not 
comparable  to  the  losses  sustained  under  the  lethargy  of 
monopoly.  Competition  keeps  open  the  ways  of  progress 
by  providing  a  fair  and  equal  chance  for  all. 

Monopoly  kills  the  incentive  for  superior  workmanship. — 
If  you  are  compelled  to  buy  your  automobile  from  me, 
why  should  I  lie  awake  at  night  planning  and  devising  how 
to  cut  the  cost  here  or  improve  the  quality  there  in  order 
to  gratify  most  highly  your  wishes?  But  the  case  would 
be  different  and  stir  me  to  the  highest  incentive  for  supe- 
rior workmanship  if  you  were  at  liberty  to  choose  from 
any  one  of  a  dozen  producers.  I  should  work  for  the  best 
in  quality,  the  best  in  salesmanship,  the  lowest  in  price. 
The  truth  of  this  seems  to  find  evidence  in  the  steel  busi- 
ness. Prior  to  the  formation  of  the  trust  the  Carnegie 
Company  was  the  best-organized  steel  company  in  the 
world,  and  it  was  manned  by  the  most  efficient  steel- 
makers. It  was  second  to  none  in  its  accomplishments 
and  methods.  The  same,  it  is  thought,  cannot  be  said  for 
the  trust.  The  trust  has  vast  resources  and  the  best 
management  that  money  can  hire.  But  the  best  manage- 
ment cannot  overcome  the  lethargy  of  monopoly. 

22.  Summary  and  Conclusion. — Many  writers  fail  to 
differentiate  among  monopolies.  One  group  begins  its 
treatment  of  the  subject  by  explaining  "the  breakdown  of 


578  Introduction  to  Economics 

competition"  and  follows  by  condemning  our  "blind  faith 
in  competition."  They  never  weary  in  pointing  out  the 
"wastes  of  competition"  and  they  paint  in  glowing  colors 
the  virtues  of  all  monopoly  control  as  a  panacea  for  all 
industrial  ills.  Another  group  of  writers  would  destroy 
monopolies  without  further  ado.  They  think  that  one 
principle  governs  all  forms  of  monopoly,  and  that  unbridled 
competition  may  be  universal  in  business  affairs. 

A  one-point-of-view,  whether  for  or  against  monopolies, 
is  fallacious.  We  should  justly  condemn  as  a  quack  the 
practitioner  in  medicine  who  would  treat  acute  appendi- 
citis and  sore  eyes  with  the  same  cure-all  remedy.  We 
should  be  no  less  severe  in  condemning  the  one-point-of- 
view  economist.  We  must  diagnose,  then  prescribe.  It 
will  be  found  in  the  following  chapter  that  different  monop- 
olies obey  different  principles,  that  all  cases  of  monopoly 
are  not  covered  by  a  common  blanket  principle. 

There  are  government  monopolies  organized  for  govern- 
ment profit  and  others  organized  to  render  service  at  cost 
or  gratuitously.  Here  different  principles  are  involved. 
There  are  private  monopolies,  some  of  which  are  natural 
and  obey  the  principle  of  increasing  costs,  others  are  capi- 
talistic and  obey  the  principle  of  diminishing  costs  per  unit 
of  commodity  output.  Here  again  different  principles  are 
involved.  Some  monopolies  have  large  fixed  capital,  while 
others  with  little  fixed  capital  survive  through  unfair  prac- 
tices and  illegal  agreements.  Again,  different  principles 
are  involved. 

23.  Conclusion  of  Chapter. — 1.  The  greatest  productive 
efficiency,  on  the  whole,  is  to  be  found  in  competition 
rather  than  in  monopoly.  The  technical  advantages  of 
large  production  may  be  enjoyed  by  the  large  competitor 
as  well  as  by  the  monopolist. 


Large -Scale  Production  and  Monopoly     570 

2.  Regulated  monopoly  is  preferable  to  unbridled  com- 
petition of  the  cutthroat  type.  A  business,  such  as  a  rail- 
road, requiring  large  fixed  capital  and  operating  subject 
to  the  principle  of  diminishing  costs  is  in  nature  a  monopoly 
and  should  be  regulated  as  such.  Antimonopoly  moves  in 
such  cases  are  positively  destructive.  No  one  will  sink 
large  capital  in  such  enterprises  unless  he  may  enjoy  the 
protection  which  the  nature  of  the  institution  demands. 

3.  Monopolies  which  result  from  artificial  combination 
or  unfair  practices  should  not  be  tolerated.  The  majority 
of  manufacturing  concerns  such  as  steel,  oil,  tobacco,  and 
sugar,  soon  reach  the  magnitude  of  the  single  business  unit 
where  the  point  of  maximum  efficiency  is  attained.  The 
great  corporation  increases  its  size  not  by  enlarging  the 
single  individual  units,  but  by  increasing  the  number  of 
such  units.  The  independent  producer  whose  plant  has, 
in  all  of  its  parts,  attained  to  the  best  adjustment  enjoys 
all  of  the  technical  advantages  of  the  large  concern  which 
controls  a  number  of  business  units.  What  is  more,  he 
enjoys  all  the  advantages  of  competition ;  he  has  no  monop- 
oly to  make  him  secure.  Despite  opinions  to  the  contrary, 
it  is  the  consensus  of  opinion  that  one  secure  in  monopoly 
power  tends  to  become  listless,  non-inventive,  indifferent 
to  new  methods  and  economies. 

24.  Exercises. — 1.  If  fifty  small  concerns  unite  it  be- 
comes possible  for  the  best  talent  to  direct  the  business. 
But  does  a  combination  afford  the  opportunity  for  the 
selection  of  the  best  men  ? 

2.  Were  you  offered  two  cakes  of  soap — Ivory  and  an 
unknown  brand — you  would  take  the  standardized  soap, 
but  for  all  you  know  the  unknown  brand  is  better. 

Two  important  economic  principles  are  involved  in  the 
above  statement.     What  are  they  ? 


580  Introduction  to  Economics 

3.  In  this  chapter  the  paragraphs  1  to  7  inclusive  point 
out  fifteen  advantages  of  large-scale  production.  Show 
whether  each  of  these  advantages  may  be  enjoyed  by  the 
large  competitor  as  well  as  by  the  monopolist. 

4.  To  quote  from  C.  W.  Gerstenberg's  Principles  of 
Business  (767-768):  "To  make  a  pair  of  'ladies  buck 
shoes'  takes  five  feet  of  'buck'  at  $.80  a  foot.  The  small 
pieces  left  over  are  used  to  make  children's  shoes.  What 
is  the  material  cost  of  a  pair  of  ladies'  shoes?  Should  we 
say  $4,  on  the  ground  that  we  used  up  the  five  feet  of  leather, 
and  that  anything  obtained  from  the  small  pieces  is  'found 
money';  or  shall  we  say  that  it  is  less  than  $4;  that  the 
leather  in  the  children's  shoes  did  cost  something  ?  If  the 
latter,  what  figure  should  we  use?  There  are  two  figures 
which  can  be  used — (1)  the  cost  of  similar  small  pieces  of 
leather  if  purchased  in  the  open  market;  or  (2)  the  price 
which  would  be  realized  if  the  pieces  were  disposed  of." 
Answer  the  questions  raised. 

What  is  the  by-product,  the  small  pieces  of  leather,  or 
the  children's  shoes? 

5.  Base  your  answer  to  each  of  the  following  questions 
upon  the  assumption  that  an  establishment  has  attained 
the  "best  size"  and  adjustment  of  factors. 

(a)  Are  there  any  short  or  long  factors? 

(b)  What  bearing  has  the  extent  of  the  market  for  the 
products  of  an  establishment  upon  the  "best  size"? 

(c)  Were  the  establishment  enlarged  would  it  necessarily 
follow  that  the  cost  per  unit  of  output  would  increase? 
that  the  cost  would  decrease?  that  the  cost  would  remain 
constant? 

(d)  Or  would  the  enlargement  of  the  establishment  so 
increase  the  supply  as  to  lower  the  price,  thus  diminishing 
the  profits  ? 

(e)  Is  the  "best  size"  of  an  establishment  fixed  at  the 
point  where  there  is  the  best  technical  adjustment  of  phy- 
sical factors,  or  at  the  point  which  will  yield  the  largest 
returns  in  terms  of  money  ? 

6.  What  conditions  favor  cutthroat  competition?    Does 


Large- Scale  Production  and  Monopoly     581 

cutthroat  competition  lead  to  the  formation  of  a  monop- 
oly?    Defend  your  answer. 

7.  Why  may  it  sometimes  cost  more  to  retain  a  tool  or 
machine  in  service  than  the  original  purchase  price  of  it? 

8.  What  fixes  the  maximum  that  you  could  afford  to  pay 
for  a  machine  which  would  displace  one  already  in  use? 

9.  Do  the  same  economic  principles  bear  upon  com- 
petitors and  monopolists  with  respect  to  scrapping  old 
machinery  and  installing  new? 

10.  Under  what  conditions  is  advertising  productive? 
When  is  it  a  social  waste?  Can  you  distinguish  between 
acquisitive  and  productive  advertising? 

11.  Suppose  that  a  number  of  competing  companies  are 
formed  into  a  monopoly,  with  the  result  that  200  salesmen 
are  discharged,  (a)  Would  this  show  that  the  services  of 
these  men  had  been  merely  acquisitive  rather  than  pro- 
ductive? (b)  Should  you  conclude  from  this  that  the 
monopoly  proved  itself  productive  by  displacing  labor  ? 

12.  What  do  you  care  if  monopolies  do  eliminate  the 
small  independent  businesses  ?  Is  your  answer  based  upon 
a  feeling  of  sympathy  for  the  person  ousted  or  upon  the 
effect  which  monopoly  control  has  upon  social  well-being? 


CHAPTER   XXVI 
MONOPOLY  AND  MONOPOLY  PRICE 

i.  Motive  in  competition  and  monopoly.  2.  The  test  of  monopoly. 
3.  Temporary  monopoly.  4.  Capitalistic  monopolies.  5.  Other  forms  of 
monopoly.  6.  Skilled  labor.  7.  Legal  monopolies.  8.  Natural  monopo- 
lies. 9.  Quasi-natural  monopolies.  10.  Voluntary  and  enforced  patronage. 
11.  Limitation  of  the  market.  12.  A  summary  of  market  limitations.  13. 
Monopoly  price.  14.  Increasing  costs.  15.  Institutions  of  diminishing 
costs.  16.  Monopoly  prices  vary.  17.  Domestic  and  export  prices.  18. 
Limitations  on  monopoly  price.     19.  Exercises. 

I.  Motive  in  Competition  and  Monopoly. — Monopoly 
and  competition  are  antonyms.  Complete  monopoly 
means  the  absence  of  competition.  Conversely,  free  com- 
petition means  the  absence  of  monopoly.  Monopolies 
may  be  local,  national,  or  international.  Whether  in  the 
country  village  or  in  the  large  city,  or  in  one  nation  or  in 
many  nations,  the  oneness  of  an  industry's  control  with 
respect  to  price-making  is  monopoly.  But  a  monopoly 
price  is  not  free  from  competition,  for  although  a  seller 
may  have  undisputed  ownership  of  a  complete  supply  it  is 
the  competition  on  the  side  of  buyers  which  makes  possible 
a  high  monopoly  price. 

Competition  means  a  contest  between  persons  or  groups 
of  persons;  it  is  the  attempt  of  contending  parties  to  get 
the  same  thing.  And  this  attempt  is  unrestrained  by  any 
outside  force.  Some  writers  deny  group  competition  and 
speak  of  "each  actor  .  .  .  separately  and  individually." 
But  this  is  an  error  because  group  competition  is  found  in 

582 


Monopoly  and  Monopoly  Price  583 

all  forms  of  human  endeavor.  There  is  social  competition 
such  as  competition  between  church  organizations,  socie- 
ties, and  the  like.  In  athletics,  for  instance,  the  Giants 
are  united  in  team-work,  contesting  vigorously  against  the 
Braves.  College  teams  are  contesting  against  one  another 
in  various  activities.  The  competition  between  social 
organizations  or  athletic  clubs  is  the  same  in  spirit  as  the 
competition  between  large  corporations,  each  composed  of 
numerous  stockholders.  Wherever  found,  competition  im- 
plies contest.  Contest  between  persons  or  groups  is  alto- 
gether different  from  monopoly  which  implies  oneness  of 
control. 

Each  individual  seeking  gain  through  monopoly  is  like- 
wise actuated  by  the  selfish  motive  of  maximum  returns. 
"On  the  scent  or  in  the  fight  he  makes  common  cause  with 
his  pack.  But  in  the  division  of  spoils  he  is  still  a  solitary 
eater."  l  The  socialist's  concept  of  brotherhood  exists  no 
more  inside  than  outside  the  monopoly  or  trust.  The  indi- 
vidual's motive  is  the  same  in  competition  or  in  monopoly 
— it  is  largest  self-gain. 

2.  The  test  of  monopoly  is  the  power  to  suppress  compe- 
tition and  to  control  prices  through  unified  demand  or 
a  manipulation  of  supply.  This  power  may  consist  of  a 
oneness  of  demand  or  of  a  oneness  of  supply.  When 
one  person  or  a  combination  of  persons  is  the  sole 
purchaser  of  a  commodity  such  oneness  of  buying  power 
is  termed  a  buying  monopoly.  At  an  enormous  cost 
a  pipe-line  has  been  constructed,  connecting  Cincinnati 
with  the  natural-gas  field  in  southern  West  Virginia. 
The  great  cost  of  constructing  a  competing  line  over 
this  long  distance  is,  considering  the  market,  prohibitive. 

1  Davenport's  Economics  of  Enterprise,  p.  476. 


584  Introduction  to  Economics 

This  fact  gives  the  controlling  corporation  a  buying 
monopoly  over  the  owners  of  the  gas-wells.  Or  one 
may  take  example  from  the  distribution  of  milk  in  large 
cities.  A  large  corporation  may  establish  receiving-sta- 
tions throughout  the  rural  districts,  to  which  the  farm- 
ers deliver  milk.  These  stations  are  rather  expensive  to 
construct,  equip,  and  maintain.  The  amount  of  milk  com- 
ing in  to  one  station  is  usually  not  sufficient  to  justify  a 
competitor's  entering  the  field,  thus  leaving  the  owner  of 
the  receiving-station  in  control  of  a  buying  monopoly.  In 
case  a  local  competitor  should  establish  a  receiving-station 
at  one  point,  the  large  concern,  maintaining  a  chain  of 
such  stations  covering  the  principal  milk  sections  of  one 
or  more  states,  would  increase  the  price  to  the  farmers 
•at  the  competing  point  until  the  small  competitor  is  dis- 
couraged and  quits. 

One  has  a  selling  monopoly  if  he  has  bought  up  the  avail- 
able supply,  or  if  he  has  control  of  the  power  to  produce 
a  good. 

3.  Temporary  Monopoly. — To  buy  up  the  available  sup- 
ply of  a  reproducible  good  gives  a  temporary  rather  than 
a  permanent  monopoly.  One's  purpose  in  buying  up  a 
supply,  generally  speaking,  is  to  raise  the  price  in  order  to 
secure  a  profit  on  his  investment.  But  as  soon  as  the  price 
is  materially  raised  producers  increase  their  output  as 
speedily  as  possible  in  order  to  sell  at  the  higher  price, 
thus  giving  the  monopoly  but  a  temporary  existence. 

The  manufacturer  of  a  commodity  may  enjoy  a  tempo- 
rary monopoly.  There  are  a  number  of  instances  in  which 
a  single  combination  produces  75  per  cent  or  more  of  the 
output  along  certain  lines.  Such  a  combination  must  sup- 
ply, for  the  time  being,  a  majority  of  the  purchasers.     If  it 


Monopoly  and  Monopoly  Price  585 

makes  the  price  higher  the  customers  must  pay  the  price 
or  do  without,  since  the  other  sources  of  supply  are  insuffi- 
cient to  meet  their  needs.  What  is  more,  the  small  com- 
petitor will  hesitate  to  undersell  the  corporation  possessed 
of  abundant  capital,  for  if  it  comes  to  a  price  war  the  larger 
could  drive  the  smaller  concern  from  the  market.  But  if 
the  large  concern  maintains  exorbitant  prices  it  cannot  long 
maintain  its  monopoly  power.  There  is  always  potential 
competition  in  the  form  of  new  capital  and  enterprises 
seeking  investment,  or  of  invested  capital  seeking  more 
remunerative  employment.  In  case  one  concern  main- 
tains an  exorbitant  price  this  potential  competition,  sooner 
or  later,  will  become  effective. 

4.  Capitalistic  monopolies  are  those  which  by  virtue  of  a 
great  combination  of  capital  can  suppress  competition  and 
control  the  market.  In  the  last  paragraph  it  was  pointed 
out  that  in  case  a  corporation  maintained  exorbitant  prices 
potential  competition  will  become  effective.  But  a  capi- 
talistic monopoly  usually  takes  a  more  conservative  course 
— holding  its  price  low  enough  not  to  tempt  competitors 
to  enter  the  field.  The  large  concern  can  hold  its  prices 
slightly  higher  than  can  its  small  competitor.  This  is  true 
because  the  large  concern  is  better  known.  If  wisely  man- 
aged, its  output  maintains  a  high  commercial  standard 
and  reputation.  It  gives  a  large  assortment  and  quality 
of  goods  along  its  line,  thus  enabling  it  to  fill  orders 
satisfactorily.  The  average  merchant  would  rather  pay  a 
small  fraction  more  to  a  single  large  house  which  can 
supply  his  various  needs  along  certain  lines  than  to 
divide  up  his  orders  among  a  number  of  small  competi- 
tors, thus  making  shipments  more  irregular  and  less  de- 
pendable. 


586  Introduction  to  Economics 

5.  Other  forms  of  monopoly  calling  for  consideration 
are  skilled  labor,  legal,  natural,  quasi-natural  or  public 
service.  Particular  attention  has  been  given  to  capital- 
istic monopolies  because  under  existing  conditions  they 
illustrate  the  chief  essentials  of  monopoly  power.  Their 
formation  illustrates  the  characteristic  trend  of  modern 
industry. 

6.  Skilled  labor,  in  the  form  of  closed  shops,  has  a 
monopoly.  It  can  maintain  high  prices  for  its  services 
through  restrictive  systems,  such  as  apprenticeship,  which 
limits  the  number  who  may  enter  the  occupation.  This 
form  of  monopoly,  however,  is  constantly  threatened  by  the 
invention  of  new  machinery,  by  technical  colleges  which 
are  training  men  for  such  work,  and  by  schools  and  other 
educational  means  furnished  by  the  employers. 

7.  Legal  monopolies  have  been  organized  in  some  coun- 
tries for  revenue  purposes.  France  has  a  monopoly  of 
the  manufacture  of  tobacco;  Saxony  controls  the  salt  sup- 
ply, and  Japan  the  turpentine  supply.  Tobacco  and  salt 
are  particularly  good  revenue-getters.  They  are  consumed 
in  abundance  and  the  price  may  be  so  fixed  as  to  leave  a 
large  residue  of  profit  between  cost  of  production  and 
selling  price.  The  United  States  has  a  legal  monopoly  on 
the  post-office,  but  not  for  revenue  purposes.  Govern- 
ments have  such  monopolies  on  minting — converting  bul- 
lion into  coin. 

In  certain  cases  the  control  of  copyrights  and  patents 
may  give  important  monopoly  powers.  There  are  two 
purposes  for  the  government's  granting  such  monopoly 
privileges:  (a)  They  promote  improvements  in  scholarships 
and  in  the  arts;  (b)  they  protect  capital  which  is  employed 
to  manufacture  the  article  patented  or  to  publish  the  con- 


Monopoly  and  Monopoly  Price  587 

tributions  copyrighted.  As  an  instance  in  keeping  with 
this  last  point  we  may  cite  the  experience  of  Herbert  Spen- 
cer's invention  of  a  very  desirable  type  of  chair.  Had  it 
been  patented  there  would  have  been  competing  capital 
for  the  privilege  of  manufacturing  it.  But  he  took  out  no 
patent  and  could  find  no  manufacturer  willing  to  under- 
take the  risk  of  producing  it. 

8.  Natural  monopolies  consist  in  the  ownership  of  cer- 
tain natural  resources,  such  as  the  ownership  of  the  an- 
thracite-coal field,  the  Kimberley  diamond-mines  in  South 
Africa,  and  favorable  building  sites,  mineral  springs,  and 
the  like.  In  order  that  a  monopoly  may  be  formed  of 
such  natural  resources  there  must  be  a  limited  amount  of 
these.  A  natural  monopoly  controlling  a  commodity  like 
coal  comes  to  have  tremendous  if  not  dangerous  powers 
in  the  community. 

9.  Quasi-natural  monopolies  include  such  public-service 
corporations  as  street-railways,  railroads,  telephones,  tele- 
graphs, water  and  gas  plants.  One  characteristic  of  these 
institutions  is  that  their  services  are  consumed  in  connec- 
tion with  the  plant.  One  cannot  have  a  street-car  ride 
expressed  to  him  as  he  could  a  farm-product.  If  a  water 
company  or  gas  or  telephone  company  has  extended  its 
pipes  or  wires  into  one's  house  he  must  deal  with  it  for  the 
time  being,  or  do  without.  If  a  rival  enters  the  field  it  is 
at  the  cost  of  needless  duplication. 

This  point  introduces  the  second  characteristic  of  pub- 
lic-service corporations:  the  company  on  the  ground  can 
outcompete  a  new  rival  because  it  can  do  with  little  money 
as  much  as  the  new  rival  can  with  a  large  outlay.  To 
illustrate,  if  the  growth  of  population  in  a  city  makes  an 
extra  demand  for  lighting,  the  gas  or  electric  company  can 


588  Introduction  to  Economics 

extend  its  pipes  or  lines  at  little  cost  to  supply  the  demand. 
But  the  new  rival  would  be  at  great  cost  in  constructing  a 
new  plant  before  he  could  compete.  These  institutions 
can  increase  their  output,  to  a  certain  point,  at  a  diminish- 
ing cost.  If  it  should  cost  $20,000  to  establish  a  light- 
ing-plant and  if  only  5,000  lights  were  demanded,  the 
fixed  costs  per  light  would  be  $4.  If  the  demand  calls 
for  10,000  lights  the  fixed  cost  per  light  would  be  ap- 
proximately $2.  Then,  if  we  assume  that  the  particular 
costs  per  light  remain  the  same,  there  would  be  decreas- 
ing costs  with  an  increase  of  output.  One  company  can 
meet  the  total  demand  of  a  city  far  more  cheaply  than 
can  two  companies. 

Moreover,  one  company  is  more  desirable  because  it  is 
more  convenient  than  a  number  of  competing  companies. 
Competition  between  different  telephone  systems  in  the 
same  city  causes  public  inconvenience.  Nobody  desires 
more  than  one  car-line  in  the  same  streets.  We  grow  im- 
patient at  times  with  one  water  company  for  tearing  up 
the  streets.  What  if  there  were  a  dozen  competing  com- 
panies ? 

Competition  between  public-service  corporations  can- 
not be  permanently  maintained  because  of  the  principle 
of  decreasing  cost.  There  is,  for  instance,  an  elastic  limit 
to  the  number  of  electric  lights  needed  in  a  city.  It  costs 
a  company  less  per  light  to  furnish  a  large  number  of 
lights.  If  there  are  a  number  of  competitors,  each  com- 
pany will  attempt  to  undersell  its  rivals  in  order  to  increase 
its  sales  and  volume  of  output.  It  can  then  produce  at 
the  lowest  cost.  All  the  competitors  might  increase  their 
output  and  lower  their  costs  of  production,  but  this  would 
cause  the  market  to  be  over  supplied.     Such  would  prove 


Monopoly  and  Mojiopoly  Price  589 

a  losing  venture,  because  the  competitive  price  of  their 
products  would  tend  to  be  lower  than  would  their  costs  of 
production.  In  all  like  cases  combination  would  be  wise 
for  the  competitors  as  well  as  for  society. 

10.  Voluntary  and  Enforced  Patronage.— The  natural 
and  quasi-natural  monopolies  are  in  a  position  to  command 
enforced  patronage.  The  merchant  holds  the  patronage 
because  of  past  satisfactory  dealings.  To  make  his  future 
more  than  an  accident  he  must  have  the  collective  friendli- 
ness of  customers.  He  acquires  this  collective  friendliness 
or  good-will  through  tactful,  fair  dealing.  He  enjoys 
voluntary  patronage;  the  quasi-natural  monopoly  enjoys 
enforced  patronage.  "The  railroad  lunch-counter,  the 
exclusive  cab  or  baggage  transfer-line,  the  gas,  electric, 
or  telephone  company,  and  the  street-car  companies  ex- 
pect continued  patronage,  but  this  anticipation  arises 
chiefly  out  of  the  public's  necessity,  not  from  their  pref- 
erence." 

ii.  Limitation  of  the  Market. — Monopoly  power  has 
been  approached  by  scholars  from  the  point  of  view  of 
supply.  This  is  due  to  the  fact  that  monopolies  control 
price  by  controlling  the  supply.  But  a  more  careful  study 
of  supply  must  be  approached  through  a  study  of  demand. 
One  group  of  writers  teach  that  monopoly  power  is  derived 
from  the  control  of  some  natural  advantage  in  furnishing 
the  supply.  Another  group  teaches  that  the  control  of 
large  capital  alone  may  give  monopoly  power.  Now,  de- 
mand for  goods  is  in  reality  a  demand  for  the  productive 
power  to  furnish  these  goods;  the  limitation  of  a  demand 
for  a  certain  class  of  goods  limits  in  turn  the  amount  of 
productive  power  devoted  to  the  output  of  that  class  of 
goods.     The  natural  limitation  of  the  demand  for  a  good. 


590  Introduction  to  Economics 

then,  is  a  protection  to  a  corporation  from  competition  if 
the  corporation  occupying  the  field  has  sufficient  produc- 
tive capacity  to  supply  the  demand.  In  all  forms  of  mo- 
nopoly there  are  natural  limitations  either  in  the  form  of 
demand  or  of  physical  limitations. 

If,  for  instance,  the  population  on  an  assumed  island 
demand  annually  x  units  of  sugar,  and  if  within  their 
territory  a  factory  were  established  with  an  annual  capac- 
ity of  x  units,  a  new  factory  would  hesitate  to  enter  the 
field.  If  a  new  factory  did  enter,  its  purpose  would  be  to 
force  itself  into  the  monopoly  rather  than  to  bring  about 
legitimate  competition  with  the  established  concern.  For 
a  short  time  after  the  entrance  of  the  new  concern  there 
would  be  overproduction  for  the  island,  cutthroat  com- 
petition, a  price  war,  idle  labor  and  capital  in  both  con- 
cerns for  a  considerable  portion  of  the  year.  This  game 
would  force  compromises,  agreements,  and  finally  com- 
binations. Numerous  examples  of  a  similar  nature  prove 
that  in  a  large  society  the  ultimate  consequences  would  be 
the  same  as  those  indicated  for  a  limited  society.  Why  is 
this  so  ?     Because  the  market  demand  is  limited. 

12.  A  Summary  of  Market  Limitations.1 — Some  of  the 
influences  which  limit  the  market  demand  for  goods  will 
now  be  mentioned,  (a)  The  consumer  cannot  spend  more 
than  his  income,  (b)  We  have  seen  that  his  income  is 
divided  into  numerous  lines  of  expenditure,  that  if  he 
spends  more  along  certain  lines  he  must  spend  less  along 
others;  thus  expenditures  limit  each  other,  (c)  The  con- 
sumer is  ever  measuring  his  present  against  his  desire  for 
future  goods,  he  saves  to  the  extent  that  he  denies  his 
present  for  his  future  gratification.     It  is  interesting  to 

1  Cherington's  Advertising  as  a  Business  Force,  chap.  V. 


Monopoly  and  Monopoly  Price  591 

note  how  the  seller  of  a  rather  expensive  article,  say,  of  the 
Encyclopaedia  Britannica,  can  secure  purchasers  whose  in- 
comes are  limited  and  who  are  disposed  to  save.  The 
problem  is  to  make  a  fair  portion  of  the  possible  buyers 
figure  that,  incomes  and  savings  considered,  the  price  is 
not  prohibitive.  This  is  accomplished  by  splitting  the 
price  into  small  instalments,  so  that  it  looks  small;  by  ex- 
plaining how  delay  means  waste,  because  the  price  is  to  be 
increased  after  a  certain  time ;  by  treating  the  price  as  neg- 
ligible compared  with  the  worth  of  the  goods.  One  is 
likely  to  change  his  course  if  convinced  that  what  he  had 
considered  saving  is  in  reality  wasting. 

(d)  Price  habits  tend  to  become  fixed.  This  fact  is  be- 
coming more  pronounced  to  the  extent  that  packaged  and 
branded  goods  take  the  place  of  bulk  goods  in  the  market. 
Ties,  collars,  shoes,  gloves,  hats,  tobacco,  matches,  and  a 
thousand  others,  are  sold  under  rather  well-established 
price  habits.  This  fact  makes  competition  largely  a  mat- 
ter of  service  and  of  skill  in  selling.  It  tends  to  substitute 
quality  and  satisfaction  for  the  old  haggling  method  under 
the  "let  the  buyer  beware"  principle. 

(e)  Present  saving  on  the  part  of  customers  tends  to 
limit  the  present  market,  but  it  has  the  effect  of  extending 
the  future  market.  Savings  enter,  sooner  or  later,  into 
the  production  of  more  goods.  And,  as  previously  stated, 
in  an  exchange  economy  a  good  is  a  demand  for  another 
good.  The  richer  the  community  the  greater  is  the  de- 
mand for  the  produce  which  the  consumers  desire. 

(/")  Numerous  appeals  to  the  consumer  neutralize  one 
another.  Recently  an  author  was  wondering  how  the 
consumer  could  save  anything.  "We  expend  a  billion 
annually  teaching  him  to  spend,  and  but  an  insignificant 


592  Introduction  to  Economics 

fraction  of  that  sum  on  teaching  him  to  save."  After 
some  deliberation  he  arrived  at  the  conclusion  that,  "©nly 
the  foreign  element  can  save  because  they  cannot  read  the 
ads."  Because  both  observation  and  statistics  are  against 
these  comments,  we  conclude  that  the  consumer  has  a  will 
of  his  own,  and,  further,  that  numerous  appeals  deaden  the 
effect  of  one  another.  If  no  other  advertising  existed,  the 
housewife  would  experience  a  strong  appeal  from  the  page 
advertisement  in  her  home  journal  devoted  to  Pearl  La 
Sage's  "Great  Parisienne  Beauty  Marvel,"  but  when  she 
finds  that  over  half  her  journal  is  devoted  to  appeals,  the 
mere  fact  of  their  multiplicity  deadens  the  effect  one  of  the 
other. 

(g)  The  final  consumer  determines  the  market  limit  for 
all  producers.  An  apparent  exception  to  this  is  the  fact 
that  modern  production  takes  the  form  of  a  chain  of  con- 
cerns from  the  raw  material  to  the  finished  product;  iron- 
ore  mining  *»-»•  smelting  into  pig  iron  »-*>  steel-making  »-► 
wire-making. 

In  such  a  chain—  C*^TbT'cXd*)—-B  may  be  the  sole 
purchaser  of  A's  product,  and  the  sole  source  of  C's  supply. 
B  thinks  of  C  as  his  only  market,  and  so  in  turn  C  regards 
D.  On  further  analysis  it  is  clear  that  D  does  not  limit 
C,  nor  does  C  limit  B.  They  are  the  consumers  supplied 
by  D,  who  limit  in  turn  the  output  of  D,  C,  B,  A.  Supply 
travels,  so  to  speak,  in  the  direction  from  A  to  the  con- 
sumer: 

A  *•-►  B  »-►  C  *»-*■  D  *►-*-  Consumer, 

whereas  demand  travels  in  the  opposite  direction: 
Consumer  *»->  D  **-+■  C  **-**  B  ■»-►  A. 
Demand  begins  and  supply  ends  with  the  consumer. 


Monopoly  and  Monopoly  Price  593 

13.  Monopoly  price,  we  have  seen,  is  fixed  at  the  point 
where  in  the  judgment  of  the  monopolist  the  largest  net 
return  will  ultimately  be  secured.  In  most  cases,  not  all, 
the  monopolist  will  make  fewer  sales  if  the  price  is  high 
and  more  sales  if  the  price  is  low.  Monopoly  prices  as 
well  as  competitive  prices  are  always  at  the  equating-point 
of  supply  and  demand.  The  monopoly,  demand  present, 
controls  the  price  only  because  of  its  power  to  control 
supply. 

(a)  The  simplest  case  in  monopoly  price-making  is  found 
in  a  few  cases  where  little  or  no  cost  of  production  is  found 
and  where  the  supply  is  limited.  Suppose  that  one  has 
inherited  a  collection  of  antiques.  Assume  that  the  col- 
lection is  well  known,  so  that  no  advertising  or  other  costs 
are  necessary  for  their  marketing.  What  price  will  the 
owner  place  upon  the  collection?  If  the  items  compos- 
ing the  collection  are  virtually  the  same  the  monopolist 
could  either  sell  them  at  a  uniform  price  and  all  at  one 
time,  or  he  could  sell  each  item  separately  and  at  different 
prices.  The  latter  method  would  bring  a  larger  total  price, 
because  the  lowest  price  received  by  selling  them  one  at  a 
time  would  be  the  same  as  the  uniform  price  on  the  items 
if  sold  at  the  same  time.  Assuming,  however,  that  he 
sells  all  at  once,  he  would  fix  the  price  at  the  highest  point 
that  would  clear  the  market,  that  is,  at  the  highest  figure 
at  which  all  the  items  would  be  bought.  The  monopoly 
price  in  this  instance  might  be  the  same  as  if  the  collection 
were  sold  to  a  group  of  competing  buyers,  by  a  group  of 
competing  sellers. 

(b)  The  case  would  be  different  if  one  had  a  monopoly 
of  an  unlimited  commodity  where  no  cost  is  involved.  Mo- 
nopoly always  implies  a  property  right;  so  let  us  say  that 


594  Introduction  to  Economics 

one  owns  a  natural  well,  affording  all  but  an  exhaustless 
supply  of  most  highly  desired  mineral  water.  Then  a 
price  may  be  fixed  so  high  that  "he  may  only  occasionally 
sell  a  pint  to  a  king  or  a  millionaire,  while  if  he  fixes  a  very 
low  price  he  may  sell  to  every  peasant  and  yet  get  a  very 
low  return."  The  monopolist's  problem  is  to  determine 
the  price  at  which  the  number  of  sales  multiplied  by  the 
price  per  sale  will  earn  him  the  largest  net  return.  It  is 
incorrect  to  think  of  monopoly  prices  as  always  extor- 
tionately  high,  for  instead  they  are  frequently  lower  than 
competitive  prices.  Nor  is  it  correct  to  think  of  them  as 
always  low,  for  at  times  they  are  far  above  competitive 
prices.  It  is  correct  to  think  of  monopoly  price  as  being 
fixed  at  the  point  where  the  highest  net  return  will  result. 

(c)  The  elasticity  of  consumption  enters  a  new  element 
into  our  reasoning  on  monopoly  price.  There  are  some 
commodities,  such  as  the  primary  necessities,  where  the 
volume  of  sales  varies  but  little  with  a  movement  in  price. 
The  market  demand  for  such  commodities  is  inelastic. 
Take  milk,  for  example,  which  is  a  common  necessity. 
Without  milk  the  dinner  would  be  spoiled,  and  yet  even 
though  its  price  is  high  it  forms  but  a  negligible  fraction 
of  the  cost  of  the  meal.  Too  much  milk  also  spoils  the 
dinner.  In  any  case,  whether  the  price  be  high  or  low,  we 
will  buy  about  the  same  amount  of  milk.  The  monopolist 
will  most  assuredly  fix  the  price  high. 

For  other  commodities,  luxuries,  and  semiluxuries,  the 
market  demand  is  elastic.  Their  volume  of  sales  increases 
with  a  lowering  of  price  and  decreases  with  a  rising  of  the 
price.  By  lowering  his  price  the  monopolist  does  two 
things:  first,  lowers  the  profits  on  each  sale  and,  secondly, 
secures  a  larger  number  of  sales.     His  purpose  will  be  to 


Monopoly  and  Monopoly  Price  595 

strike  the  point  where  sales  multiplied  by  profits  will  yield 
the  largest  return.  But  he  meets  with  other  complica- 
tions; he  must  determine  whether  an  increase  of  output 
will  be  at  constantly  decreasing  or  increasing  costs. 

(d)  If  the  monopolist's  cost  per  unit  of  output  remain 
constant,  8>£  would  be  the  monopoly  price  in  the  follow- 
ing table: 


Price 

No.  Sales 

Gross  Yield 

Cost 
Per  Unit' 

Total  Cost 

Profits 

IO 
9 

7 

1,000 

2,ooo 

5,000 

10,000 

10,000 
18,000 
42,500 
70,000 

8 
8 
8 
8 

8,000 
16,000 
40,000 
80,000 

2,000 

2,000 

2,500 

—  10,000 

1  For  sake  of  simplicity  costs  are  taken  as  uniform,  whether  the  yield   be 
small  or  large. 

14.  Increasing  Costs. — In  many  cases  the  cost  per  unit  of 
output  increases  as  the  volume  of  output  increases.  Other 
things  remaining  the  same,  this  will  be  found  true  in  the 
mining  of  coal.  The  greater  the  amount  mined  the  greater 
will  be  the  distance  underground  at  which  mining  opera- 
tions will  be  carried  on.  The  extra  cost  of  moving  the 
coal  over  the  longer  distance  to  the  entry  of  the  mine  must 
be  subtracted  from  the  profits.  Within  the  Kanawha 
Valley  coal-fields  there  are  mines  which  formerly  returned 
large  profits,  but  to-day  they  are  abandoned.  They  are 
abandoned,  not  because  the  coal  has  been  exhausted,  but 
because  the  mining  has  been  pushed  so  far  from  the  en- 
trance that  the  cost  of  operation  leaves  no  profit.  With 
this  thought  in  mind,  how  would  the  anthracite-coal 
monopoly  fix  its  price?  It  would,  first,  consider  the  quan- 
tity of  coal  sold  at  various  prices;  it  would  consider,  sec- 


596  Introduction  to  Economics 

ondly,  the  increasing  costs  brought  about  by  the  different 
quantities  sold  at  the  different  prices.  If  the  demand  is 
inelastic  the  monopolist  will  sharply  restrict  output.  This 
would  secure  a  large  profit  on  each  ton  sold,  and  would 
reduce  somewhat  the  volume  of  sales,  thus  keeping  down 
costs.  Another  policy  might  be  to  vary  the  prices  up- 
ward from  time  to  time  in  such  manner  as  always  to  secure 
the  highest  net  returns  for  the  time  being. 

15.  Institutions  of  diminishing  costs,  those  whose  cost 
per  unit  of  output  diminishes  as  the  volume  of  output  in- 
creases, generally  find  it  advisable  to  maintain  low  prices. 
This  is  always  true  with  respect  to  commodities  for  which 
there  are  good  substitutes  at  reasonable  prices.  It  is  true 
when  for  any  other  reason  the  market  demand  for  such 
goods  is  elastic.  But  in  case  of  goods  for  which  the  mar- 
ket demand  is  inelastic  the  price  will  be  high.  The  princi- 
ple of  diminishing  costs  could  not  operate  in  case  of  a 
monopoly,  if  the  market  demand  were  inelastic.  Physi- 
cally it  could  operate,  but  there  would  be  a  negligible  de- 
mand for  the  increased  output. 

Public  utilities  are  institutions  whose  cost  per  unit  of 
output  diminishes  up  to  a  certain  point.  Some  years  ago 
the  elevated  railroads  in  New  York  City  reduced  the  fare 
from  ten  cents  to  five  cents.  The  number  of  fares  col- 
lected the  last  year  on  the  ten-cent  basis  was  115,109,591. 
The  very  next  year  on  the  five-cent  basis  the  number  of 
fares  increased  to  158,963,232.  These  figures  indicate  that 
the  company  suffered  an  immediate  loss.  But  it  is  now- 
thought  that,  political  considerations  aside,  the  change 
has  in  the  long  run  been  profitable.  One  street-car  line  in 
Chicago,  some  years  ago,  tried  a  rate  of  twelve  rides  for  a 
quarter,  as  an  experiment.     So  phenomenal  was  the  in- 


Monopoly  and  Monopoly  Price  597 

crease  In  traffic  that  the  lower  fare  proved,  it  is  said,  more 
remunerative  than  the  five-cent  rate. 

1 6.  Monopoly  Prices  Vary. — Monopoly  price,  we  have 
seen,  is  so  fixed  as  to  allow  the  largest  net  return.  In  keep- 
ing with  this  principle,  a  monopolist  will  vary  his  prices 
in  different  places.  There  is  an  English  wine  which  is  in 
ill  repute  at  home,  where  it  sells  at  a  low  price;  the  same 
wine  is  highly  esteemed  in  the  fashionable  circles  of  Paris, 
where  the  monopolist  holds  it  for  a  high  price.  Americans 
are  comparatively  wealthy  and  spend  rather  freely,  whereas 
in  comparison  the  Italians  are  poor  and  spend  their  means 
more  sparingly.  An  American  company  is  said  to  sell  the 
same  lawn-mower  cheaper  there  than  at  home.  Monopo- 
lies charge  class  prices  when  practicable.  Railroads  are 
exemplary  of  this,  as  a  few  instances  will  show:  They  run 
special  trains  with  extra  charge,  charge  different  prices  for 
single  tickets  and  commuter's  thirty-trip  tickets;  charge 
prices  differing  entirely  out  of  proportion  to  the  difference 
of  service  for  first  and  second  class  tickets;  parlor-cars  and 
drawing-rooms  and  other  special  features  are  provided  to 
appeal  to  different  classes. 

17.  Domestic  and  Export  Prices. — Large  corporations 
and  monopolies  sometimes  sell  in  a  foreign  market  cheaper 
than  at  home.  This  practice  is  invariably  condemned  in 
the  home  market.  To  avoid  this  public  disfavor,  the 
monopolist  spares  no  effort  to  conceal  the  fact  that  he 
favors  the  foreign  market  in  price.  The  public  dislikes  a 
monopoly  at  best,  and  this  dislike  is  kindled  into  acute 
resentment  by  the  idea  of  discrimination  in  favor  of  for- 
eigners. It  is  not  a  consistent  policy  of  monopolies  to 
favor  the  foreign  market  in  price,  yet  there  are  probably 
very  few  monopolists  who  do  not  at  times  sell  at  a  low 


598  Introduction  to  Economics 

price  in  the  foreign  market.  This  practice  is  technically 
known  as  " dumping,"  and  is  done  in  order  to  protect  the 
home  market,  to  keep  the  plant  going,  and  to  develop 
a  foreign  field. 

The  home  demand  for  a  particular  product  changes  from 
time  to  time,  depending  upon  the  seasons  of  the  year  and 
upon   the  variations  of  industrial  prosperity.     At   those 
periods  when  the  demand  in  the  home  market  is  cut  short, 
as  well  as  in  periods  of  prosperity,  the  monopoly  desires  fully 
to  employ  its  plant.     It  must  keep  the  capital  employed 
because  the  interest  charge  for  idle  capital  is  no  less  than 
for  active  capital.     A  chief  problem  for  the  monopoly  is 
to  maintain  a  large  and  well-organized  labor  force.     This 
would  be  all  but  impossible  were  a  plant  forced  to  run 
intermittently.     To  build  up  and  sustain  a  nicely  adjusted 
organization  throughout  a  large  concern  requires  a  rather 
steady  output.     Large  concerns  oftentimes  buy  practically 
all  of  the  output  of  certain  raw  materials.     When   the 
plant  is  constantly  employed  it  buys  these  raw  materials 
regularly  and  in  large  quantities,  thus  securing  a  depend- 
able supply  at  favorable  prices.     Thus,  in  order  to  keep 
the  plant  fully  employed,  to  avoid  the  wastes  of  idle  capi- 
tal, to  maintain  an  organized  force  of  laborers  and  to  be 
guaranteed  a  steady  supply  of  raw  materials,  combinations 
frequently  lower  the  export  price  in  order  to  dispose  of  a 
surplus.     This  tends  to  maintain  a  rather  steady  price  in 
the  domestic  market.     Such  a  policy  is  wise  for  the  monop- 
oly in  that  it  protects  the  most  desirable  market.     This 
policy  is  also  advantageous  for  the  domestic  market  be- 
cause it  eliminates  wide  price  fluctuations.     It  removes  an 
undesirable  speculative  or  gambling  feature  from  business. 
Again,  certain  concerns,  oil  and  tobacco,  for  instance, 


Monopoly  and  Monopoly  Price  599 

consistently  maintain  a  low  price  in  certain  foreign  fields 
in  order  to  introduce  their  product  and  thus  develop  a 
foreign  market. 

1 8.  Limitations  on  Monopoly  Price. — There  is  an  elastic 
market  demand  for  the  great  majority  of  commodities. 
The  monopolist  would  find  his  price  limited  even  on  a 
necessity  such  as  wheat,  for  if  it  is  high  rye  or  corn  would 
be  substituted.  If  anthracite  coal  is  priced  too  high  other 
fuels  will  be  used.  A  lumber  monopoly  would  find  its 
price  limited  by  other  building  materials — brick,  cement, 
or  stone.  If  the  boat-line  asks  too  much  for  moving  sand 
and  building-stone,  the  sand  and  building-stone  will  not 
move.  The  Chesapeake  and  Ohio  Railroad  is  the  chief 
outlet  for  the  great  Kanawha  Valley  coal-field.  Neverthe- 
less, this  road  must  limit  its  rates,  for  the  coal  cannot  be 
mined  if  the  rates  absorb  the  profits.  Other  coal-fields  will 
supply  the  market  and  over  other  roads.  Thus  monopoly 
price  is  limited  by  the  principle  of  substitution  and,  in  some 
cases,  by  the  abandonment  of  industries,  which  depend  on 
the  monopoly. 

Again,  potential  competition  in  case  of  capitalistic  mo- 
nopolies always  threatens  to  enter  the  field.  Then,  too, 
the  monopoly  must  reckon  with  legal  interference.  If  the 
monopoly  price  be  exorbitant,  public  inspection  and  litiga- 
tion are  likely  to  follow.  Corporations  practise  ingenious 
devices  at  times  to  hide  large  returns  so  as  to  give  an 
appearance  of  normal  to  swollen  incomes. 

19.  Exercises. — 1.  "The  exclusive  privilege  of  making 
and  selling  a  product  is  a  monopoly  in  its  completest  form 
.  .  .  and  it  can  raise  the  price  of  what  it  sells  without  hav- 
ing in  view  any  other  consideration  than  its  own  interest." 
(J.  B.  Clark.)     What  is  omitted  in  this  definition? 


600  Introduction  to  Economics 

Monopoly  used  as  a  synonym  for  scarcity:  "Landown- 
ership  is  perhaps  the  greatest  single  monopoly  with  which 
society  must  grapple.  There  is  no  sense  of  the  word  in 
which  the  private  ownership  of  land  is  not  monopolistic. 
Were  there  enough  land  to  go  around,  and  some  to  spare, 
landownership  would  be  in  no  sense  a  monopoly."  (Scott 
Nearing.)  Criticise  this  statement,  mainly  from  the  stand- 
point of  the  use  of  the  word  ''monopoly." 

"Monopoly  is  such  a  degree  of  control  over  the  supply 
of  goods  in  a  given  market  that  a  net  gain  will  result  to 
the  seller  if  a  portion  is  withheld."  (F.  A.  Fetter.)  Would 
this  include  a  buying  monopoly?  Will  withholding  a  por- 
tion always  secure  a  net  gain  for  the  monopoly  seller? 

"A  monopoly,  as  the  derivation  of  the  word  implies,  is 
a  restriction  imposed  by  a  government  upon  the  sale  of 
certain  services."  (A.  L.  Perry.)  Would  this  definition 
hold  in  the  days  of  Queen  Elizabeth?     Will  it  serve  now? 

2.  What  is  the  test  of  monopoly? 

3.  Enumerate  the  kinds  of  monopoly  mentioned  in  this 
chapter. 

4.  In  a  so-called  capitalistic  monopoly  are  there  natural 
limitations  which  protect  the  monopoly?  (See  section 
n  above.) 

5.  What  is  the  practical  importance  of  studying  market 
limitations  such  as  are  outlined  in  paragraph  12  above? 
What  suggestions  might  such  a  study  give  one  who  is 
planning  an  advertising  campaign  for  the  Franklin  auto- 
mobile ? 

6.  In  what  sense  can  a  monopoly  "fix  the  price"? 

7.  What  motive  guides  the  monopoly  in  the  determina- 
tion of  the  price  of  its  product? 

8.  If  you  had  a  monopoly  of  salt  which  you  sell  at  eight 
cents  a  pound,  would  you  raise  the  price  should  the  gov- 
ernment levy  a  tax  of  one  cent  a  pound  on  it?  If  so  how 
much? 

Substitute  a  good  for  which  there  is  a  very  elastic  mar- 
ket demand  for  the  word  salt  in  the  above,  and  formulate 
your  reply. 


Monopoly  and  Monopoly  Price  601 

9.  "When  a  commodity  is  at  a  monopoly  price,  it  is  at 
the  very  highest  price  at  which  the  consumers  are  willing 
to  purchase  it."     (David  Ricardo.) 

What  consumers,  all  or  a  particular  class  ? 

Is  the  statement  true  if  it  means  the  highest  price  which 
the  most  wealthy  would  pay? 

If  he  means  the  highest  price  that  some  class  would  pay, 
would  the  same  be  true  in  case  of  any  competitive  price? 

10.  Does  it  make  any  difference  in  your  reasoning  on 
monopoly  price  of  a  good  whether  the  cost  of  production, 
with  an  extension  of  output,  is  constant,  increasing,  or  de- 
creasing ? 

n.  Why  do  corporations  sometimes  sell  cheaper  in  the 
export  market  than  in  the  domestic  market?  Is  this  ever 
justified  ? 


CHAPTER   XXVII 
CONTROL  OF  TRUSTS 

i.  Trust  defined.  2.  Pools.  3.  Statements  in  point  by  Taussig  and 
Jenks.  4.  Railroads  during  the  World  War.  5.  The  situation  at  the  close 
of  the  war.  6.  The  legal  form  of  trusts.  7.  From  trusts  to  holding  com- 
panies. 8.  From  holding  companies  to  mergers.  9.  The  purpose  of  trust 
legislation.  10.  The  hazard  of  the  business  man.  n.  Competition  and 
attempt  to  monopolize.  12.  Common  law  on  restraint  of  trade.  13. 
Laissez-faire  and  control.  14.  The  Sherman  Anti-Trust  law.  15.  The 
prevention  of  trusts.  16.  The  Standard  Oil  case.  17.  Prevention  or  de- 
struction. 18.  Trust  regulation.  19.  Need  of  further  legislation.  20. 
Unfair  methods  of  competition.  21.  The  Anti-trust  legislation  of  1914. 
22.  The  Federal  Trade  Commission.  23.  Holding  companies  and  interlock- 
ing directorates.     24.  The  Webb-Pomerene  act.     25.  Exercises. 

i.  Trust  Defined. — Common  parlance  applies  the  word 
trust  to  any  form  of  large  production  or  monopoly.  This 
inexact  usage  renders  the  term  incapable  of  scientific  dis- 
cussion. More  accurately  speaking,  a  trust  is  not  a  pub- 
lic utility,  nor  is  it  a  legal  or  natural  monopoly.  It  rests 
upon  no  special  franchise,  no  right  of  eminent  domain,  no 
single  important  patent.  The  following  are  public  utilities, 
not  trusts;  railroads,  telegraphs,  telephones,  water-sup- 
plies, gas  and  electric  plants. 

Trusts  apply  to  industrial  combinations,  manufacturing 
corporations  in  particular,  with  such  technical  and  finan- 
cial powers  as  to  dominate  in  some  line  of  production. 
They  may  or  may  not  be  monopolies,  but  they  are  formed 
to  avoid  the  wastes  of  competition.  It  is  fair  to  assume 
that  the  goal  of  such  combinations  is  at  least  some  mo- 

602 


Control  of  Trusts  603 

nopoly  power.  So  much  for  trusts  in  the  economic  sense. 
The  legal  concept  of  the  word  should  wait  for  treatment 
until  after  a  discussion  of  the  pool. 

2.  Pools. — The  pool  was  the  usual  form  of  combination 
prior  to  the  era  of  trusts.  It  will  not  do  to  say  that  the 
pool  is  an  institution  belonging  only  to  the  past,  for  while 
legally  dead,  there  are  evidences  of  its  actual  survival. 
This  form  of  combination  is  held  together  by  an  agreement 
on  the  part  of  competitors  to  accomplish  one  or  more  of 
the  following:  to  limit  production,  to  maintain  prices,  to 
divide  territory,  to  divide  profits. 

Competing  manufacturers  have  formed  pools,  some  of 
which  have  accomplished  good.  There  are  examples 
where  the  association  maintained  a  uniform  inspection  for 
the  output  of  the  several  companies  in  the  pool.  Each 
manufacturer,  in  consequence,  turned  out  a  product  of 
high  standard.  The  output  was  marketed  at  a  reasonable 
price,  because  under  the  pool  there  were  no  cross-freights, 
better  transportation  rates,  minimum  costs  of  marketing, 
and  few  bad  debts. 

The  chief  examples  of  pools,  however,  have  not  been 
among  the  manufactories  but  among  the  railroads.  In 
the  early  days  railroads  were  looked  upon  just  as  any 
other  form  of  competitive  business.  Shippers  were  at 
liberty  to  drive  the  best  bargain  possible  with  the  rail- 
roads, and  the  railroads  were  permitted  to  offer  discrimi- 
nating rates  to  attract  shippers. 

The  fixed  capital  of  a  railroad  is  large  and  its  particular 
cost  for  moving  a  unit  of  freight  is  negligible,  so  its  interest 
lay  in  getting  a  large  volume  of  freight  even  though  the 
rates  were  low.  Long-distance  freights  were  probably 
lower  in  this  country  than  in  any  other  nation.     Yet  ship- 


604  Introduction  to  Economics 

pers  and  the  public  generally  objected  because  the  rates 
were  so  discriminating  as  to  hinder,  in  many  cases  to  de- 
stroy, competition  among  shippers.  Certain  large  man- 
ufacturing monopolies  owe  their  existence  to  unfair  rail- 
road rates.  These  effects  of  unfair  rebating  upon  other 
kinds  of  business  caused  rebating  to  fall  into  opprobrium. 

In  fairness  to  the  railroads,  however,  it  must  be  said 
that  they  did  not  welcome  the  rebating  which  they  them- 
selves practised.  They  wished  to  get  as  much  as  possible, 
but  the  nature  of  their  business  forced  them  to  practise 
rate  discrimination  as  a  competitive  necessity.  As  a 
means  of  relief  from  this  competition,  so  costly  for  both 
the  public  good  and  the  roads,  the  railroads  sought  to  form 
pools.  Regarding  the  wisdom  of  permitting  such  pools, 
I  shall  quote  the  opinions  of  two  eminent  authorities. 

3.  Statements  in  Point  by  Taussig  and  Jenks.1 — "The 
natural  step  for  competitive  railways  is  to  put  an  end  to 
competition  by  combining  to  fix  rates  once  for  all.  Hence 
railway  pools  and  combinations  appeared  at  an  early  date, 
as  a  means  of  putting  an  end  to  'ruinous'  or  'cutthroat' 
competition.  Such  pools  are  hard  to  hold  together,  at 
least  under  the  English  and  American  law,  which  make 
them  void  and  non-enforceable;  but,  so  far  as  they  go, 
they  check  the  tendency  to  special  rates  for  favored  ship- 
pers. They  are  thus  a  means  of  furthering  equality  of 
treatment  and  equality  of  industrial  opportunity.  Whether 
or  no  it  be  sound  policy  to  prohibit  combinations  and  price 
agreements  in  other  industries,  almost  all  careful  observers 
of  railways  agree  that  as  to  them  such  prohibition  is  un- 
wise. None  the  less,  our  Interstate  Commerce  Act  pro- 
hibited combination  of  any  sort;  and  the  prohibition  was 

1  Taussig's  Principles  of  Economics  (2d  ed.,  1915),  II,  pp.  379-380. 


Control  of  Trusts  605 

made  even  more  drastic  by  the  general  anti-monopoly  act 
of  1890,  known  as  the  Sherman  Law." 

In  an  address  before  the  reconstruction  committee  of  the 
National  Civic  Federation  (December  2,  19 18)  Professor 
J.  W.  Jenks  said;1  "I  suppose  you  were  all  very  much 
impressed,  as  I  was,  with  the  fact  that  when  Secretary 
McAdoo  was  made  director-general  of  the  railways,  his  very 
first  order  was  to  permit  universal  pooling  of  the  railroads. 
That  is  to  say,  under  the  powers  that  were  given  him,  and 
in  these  extraordinary  war  times,  he  did  exactly  what  all 
of  the  railroad  managers,  all  of  the  economists,  who  had 
studied  the  subject,  and  the  Interstate  Commerce  Com- 
mission itself  from  its  very  first  organization  on  to  the 
present  time,  had  recommended.  The  bitterest  discussions, 
at  the  time  the  Interstate  Commerce  Act  was  passed  in 
1887,  were  over  the  anti-pooling  section  of  the  Act.  The 
railroads  favored  pooling  under  government  supervision. 
But  Congress  put  into  the  law  the  anti-pooling  clause, 
and  in  spite  of  the  fact  that  the  first  Interstate  Commerce 
Commission,  under  the  wise  leadership  of  Judge  Cooley, 
and  many  of  the  succeeding  Interstate  Commerce  Com- 
missions have  recommended  that  that  anti-pooling  clause 
be  repealed  and  pooling  under  government  supervision  be 
permitted,  the  political  feeling  of  the  country  has  been 
against  it;  and  it  was  not  until  we  were  under  the  stress 
of  war  that  the  advantages  of  centralized  action  could  be 
secured." 

4.  Railroads  During  the  World  War. — Experience  as 
well  as  the  theory  of  the  case  attest  to  the  wisdom  of  rail- 
way combinations.  Hampering  legislation  has  endeavored 
to  enforce  competition  among  railroads,  even  though  the 
1  National  Civic  Federation  Review,  December  20,  1918. 


606  Introduction  to  Economics 

laws  of  economics  necessitate  combination.  In  conse- 
quence of  this  legislation  the  maximum  utilization  of  the 
roads  has  been  prevented.  When  the  war  came  the  rail- 
roads were  forced  to  assume  a  gigantic  task,  they  were 
strained  to  the  breaking-point  under  the  compulsion  of 
making  vast  additions  to  their  normal  volume  of  freight. 
One  of  two  things  had  to  be  done;  either  legislative  restric- 
tions had  to  be  removed,  or  the  government  had  to  take 
over  and  operate  the  roads.  The  latter  was  chosen,  for 
the  public  opinion  back  of  this  legislation  was  unyielding. 
That  it  might  correct  the  results  of  its  own  decrees,  the 
government  had  to  become  the  operator,  so  as  to  ignore 
the  decrees.  Now  that  the  war  is  over  and  the  govern- 
ment has  the  roads,  all  are  interested  to  know  what  it  is 
going  to  do  with  them. 

5.  The  Situation  at  the  Close  of  the  War. — Three  mea- 
sures are  advocated  for  the  railroads:  absolute  private  own- 
ership and  operation,  absolute  government  ownership  and 
operation,  private  ownership  and  operation  under  the  gov- 
ernment's supervision.  Absolute  private  ownership  and 
operation  now  seems  impossible.  Such  laws  as  the  Adam- 
son  bill  of  August,  1916,  fixes  the  scale  of  wages  the  owner 
must  pay.  The  owner  is  not  free  in  the  making  of  con- 
tracts which  fix  his  costs  of  operation.  Nor  is  he  at  liberty 
to  make  those  contracts  which  determine  his  income.  The 
Interstate  Commerce  Commission  fixes  the  rates,  which  are 
the  source  of  income.  One  governmental  body  determines 
the  outgo  and  another  fixes  the  income;  between  these 
stands  the  owner  to  pay  the  bills  as  best  he  can.  They 
were  not  far-seeing  statesmen  who  would  fix  upon  these 
means  for  the  promotion  of  improvements  and  the  growth 
of  railway  systems  in  keeping  with  the  needs  of  a  rapidly 
developing  country. 


Control  of  Trusts  607 

A  discussion  of  the  controversial  point  of  public  owner- 
ship and  control  would  not  serve  our  purpose  here.  The 
sounder  judgment,  in  my  opinion,  looks  toward  such  a 
modification  of  existing  legislation  as  will  give  the  public 
the  benefits  of  private  ownership  and  control,  but  under  a 
governmental  supervision  that  will  at  once  safeguard  the 
public  interests  and  free  the  railroads  from  artificial  re- 
straints. 

Enough  has  been  said  to  show  that  the  efforts  to  do 
away  with  pools  have  conspicuously  failed  of  their  object. 
With  respect  to  manufacturing  companies,  when  they  have 
been  forbidden  to  form  contracts  for  their  mutual  benefit 
they  have  found  ways  of  evading  the  law.  The  old  way 
to  evade  the  law  was  to  form  a  trust. 

6.  The  Legal  Form  of  Trusts. — The  word  trust  in  its 
economic  sense  has  been  defined,  and  it  is  in  this  sense  that 
the  word  is  now  used.  In  the  legal  formation  of  a  trust 
the  holders  of  voting  stock  in  the  competing  companies 
would  surrender,  in  most  cases,  a  majority  of  all  their  stock 
to  a  board  of  trustees.  Thus  a  central  board  controlled 
the  vote  and  directed  the  policy  of  the  companies.  A 
single  voting  trust  for  the  competing  companies  secured 
harmony  in  action  as  to  kind  of  product,  volume  of  output, 
and  price.  The  holders  exchanged  their  stock  for  trust 
certificates,  and  were  paid  dividends  proportionate  to  the 
certificates.  The  Standard  Oil  Trust  was  formed  in  1882, 
but  the  so-called  trust  period  was  from  1888  to  1897. 

7.  From  Trusts  to  Holding  Companies. — Under  the  pres- 
sure of  the  law  the  pool  gave  way  to  the  trust,  then  the 
trust  proved  to  be  illegal  and  was  given  up  in  favor  of  the 
holding  company.  In  the  year  1889  the  state  of  New  Jer- 
sey assumed  the  responsibility  of  changing  the  trust  policy 


608  Introduction  to  Economics 

of  the  United  States.     In  that  year  New  Jersey  enacted 
an  amendment  to  its  corporation  law  which  read: 

"  Any  corporation  may  purchase,  hold,  sell,  assign,  transfer, 
mortgage,  pledge,  or  otherwise  dispose  of  the  shares  of  the  capital 
stock  of,  or  any  bonds,  securities,  or  evidences  of  indebtedness  cre- 
ated by,  any  other  corporation  or  corporations  of  this  or  any  other 
state,  and  while  owner  of  said  stock  may  exercise  all  the  rights, 
powers,  and  privileges  of  ownership,  including  the  right  to  vote 
thereon." 

Now,  a  company  in  any  state  is  at  liberty  to  take  out  its 
articles  of  incorporation  in  any  other  state;  therefore,  any 
company  desiring  the  privileges  of  a  holding  company 
would  turn  to  the  state  of  New  Jersey.  Thus,  an  enact- 
ment of  this  one  state  legalized  holding  companies  in 
reality  for  the  whole  country.  In  order  to  hold  their  cor- 
porations, other  states  followed  in  the  lead  of  New  Jersey. 
This  is  an  excellent  example  of  how  competition  among 
states  leads  to  loose  legislation.  Under  the  governorship 
of  Woodrow  Wilson  that  state  again  led  the  way  in  19 13, 
when  it  passed  the  "Seven  Sisters  Act"  which  made  illegal 
holding  companies  for  the  purpose  of  monopolizing  or  in 
restraint  of  trade. 

Under  the  trust  form  the  stock  is  simply  placed  in  the 
hands  of  trustees  for  management.  Whereas  the  holding 
company  actually  owns  the  stock  of  the  constituent  com- 
panies. The  management  and  operation  in  the  holding 
company  are  virtually  the  same  as  under  the  trust.  The 
difference  between  the  two  is  a  matter  of  form  rather  than 
of  reality. 

Some  leading  examples  of  holding  companies  are  the 
Standard  Oil  Company,  the  United  States  Steel  Corpora- 
tion, and  the  American  Tobacco  Company.     In  191 1  the 


Control  of  Trusts  (>09 

first  and  the  last  of  the  above-named  companies  were  dis- 
solved. These  were  test  cases  proving  the  holding  com- 
pany to  be  illegal  when  it  exists  in  restraint  of  trade. 
Again,  under  the  pressure  of  law,  combinations  began  to 
take  on  a  new  form  of  organization.  Since  1904  mergers 
have  become  important. 

8.  From  Holding  Companies  to  Mergers. — The  merger 
is  the  final  stage  in  the  concentration  of  control.  There 
are  no  constituent  companies  in  the  merger.  The  master 
company  buys  in  and  cancels  the  stock  of  other  compa- 
nies. The  only  outstanding  or  remaining  stock  is  that 
of  the  master  company.  To  take  an  example  from  Presi- 
dent Van  Hise:1  "If,  for  instance,  the  different  companies 
of  the  United  States  Steel  Corporation — the  Federal  Steel, 
the  Carnegie  Steel,  and  others — cease  to  exist  by  their 
stock  being  cancelled  and  stock  of  the  Steel  Corporation  be 
the  only  existing  issue,  we  should  have  the  final  stage  of 
corporation  management  for  this  gigantic  company." 

This  is  a  brief  history  of  the  changing  forms  of  combina- 
tion. But  despite  these  changes  in  form  the  fact  of  con- 
centrated control  persists.  "The  trust  problem"  is  the 
problem  of  obtaining  a  proper  disposition  of  the  central- 
ized control  over  industries. 

9.  The  Purpose  of  Trust  Legislation. — The  purpose  of 
trust  legislation  is  to  declare  a  public  industrial  policy 
and  to  provide  the  means  for  making  that  policy  effective. 
Its  essence  is  to  prevent  artificial  monopoly  and  to  main- 
tain competition.  Our  legislatures  and  courts  have  not 
been  indifferent  to  questions  of  efficiency  in  the  manufac- 
ture of  physical  commodities,  but  such  questions  have 
been  regarded  as  of  little  consequence  in  comparison  with 

1  Concentration  and  Control,  p.  71. 


610  Introduction  to  Economics 

such  matters  as  the  scope  of  individual  initiative,  an 
equitable  distribution  of  wealth,  and  a  fair  field  for  all 
producers.  Our  public  policy  has  in  view  not  so  much  the 
technical  advantages  of  monopoly  or  competition  as  the 
economic  organization  which  will  give  us  the  kind  of  society 
we  want.  Competitive  trade  fosters  a  healthful  social 
stimulus:  It  bears  a  social  character  which  monopoly  de- 
stroys. Competitive  prices  are  governed  by  forces  outside 
of  any  one  man.  They  are  democratic,  not  despotic;  they 
are  accepted  as  fair  and  do  not  bear  the  sting  of  personal 
extortion.  Any  contract  to  control  prices  or  restrain  com- 
petition is  declared  void,  as  against  the  public  policy. 

We  have  seen  that  public  utilities  are  not  competitive 
in  nature.  It  has  been  pointed  out  that  artificially  to  en- 
force competition  among  such  institutions  is  harmful.  An 
enlightened  public  policy  must  be  based  upon  an  analysis 
of  the  economic  nature  of  industries.  Analysis  must  pre- 
cede any  attempt  to  eliminate  abuses  and  to  preserve 
initiative  and  flexibility.  Our  policy  aims  to  shield  the 
public  against  the  lethargy  of  industrial  monopoly,  which 
shows  itself  in  poor  service,  uneconomical  production,  high 
and  discriminating  prices.  It  would  insure  a  "square 
deal"  to  investors  and  employees. 

Our  laws  are  not  yet  so  complete  as  to  remove  uncer- 
tainty among  business  men  by  defining  what  they  may 
and  may  not  do.  As  yet,  unfortunately,  well-meaning 
capitalists  refrain  at  times  from  undertaking  needed  enter- 
prises because  our  laws  are  not  specific  and  they  are  not 
well  adjudicated.  Business  men  with  the  most  commend- 
able motives  may  find  their  enterprises  subject  to  costly 
litigation  and  possible  dissolution.  The  public  policy  and 
the  law  are  not  in  complete  harmony. 


Control  of  Trusts  611 

10.  The  Hazard  of  the  Business  Man. — But  our  laws 
must  be  expressed  in  general  terms,  for  if  we  specifically 
define  or  enumerate  the  acts  to  be  considered  illegal,  un- 
scrupulous competitors  will  be  quick  to  invent  a  new 
means  of  disobeying  the  spirit  of  the  law.  It  has  been 
aptly  said  that  we  dare  not  define  the  word  "fraud,"  for 
our  definition  would  be  defrauded  as  soon  as  we  made  it. 
Then,  if  we  cannot  protect  the  honest  business  man  by 
specifically  defining  illegal  acts,  it  would  be  well  could  we 
have  a  board  or  commission  with  power  to  advise  on  such 
matters.  A  capitalist,  for  instance,  wishes  to  establish  a  sell- 
ing agency  which  would  necessitate  his  making  a  number 
of  contracts  with  other  business  men.  Would  his  agency 
be  legal?  Would  his  contracts  be  enforcible?  If  he  con- 
sults his  own  attorneys  they  can  render  him  only  unofficial 
advice.  There  is  no  one  to  whom  he  may  turn  for  an 
authoritative  reply.  He  trusts  to  luck,  takes  the  risk, 
and  hazards  his  capital.  After  his  business  is  under  way 
the  Attorney- General  may  institute  suit  against  him:  He 
fights  the  suit  for  the  existence  of  his  business  and  it  is 
only  upon  the  outcome  of  this  costly  suit  that  he  learns 
whether  his  business  is  legal  or  illegal. 

Why,  then,  do  we  not  establish  a  commission  to  advise 
the  undertakers  of  business  enterprises?  The  fact  is  that 
some  members  of  Congress  and  perhaps  the  majority  of 
citizens  throughout  the  country  were  of  the  opinion  that 
the  Federal  Trade  Commission  would  perform  this  very 
function.  But  it  is  the  function  of  the  court  to  interpret 
the  law.  Congress  could  not  constitutionally  confer  such 
authority  on  a  commission.  Congress  is  not  at  liberty 
to  transfer  the  powers  of  the  judiciary,  for  authority  to 
take  away  powers  implies  the  authority  to  abolish. 


612  Introduction  to  Economics 

In  a  sense,  the  frequent  change  of  administrations  with 
the  consequent  enactment  of  new  trust  legislation  is  un- 
fortunate. Frequent  changes  in  legislation  disturb  busi- 
ness. It  takes  time  for  business  to  become  thoroughly 
adjusted  and  for  the  laws  to  become  reasonably  adjudi- 
cated.    Stable  conditions  give  confidence  to  capital. 

ii.  Competition  and  Attempt  to  Monopolize. — To  obtain 
the  largest  net  returns  from  an  establishment  is  primarily 
a  technical  problem  of  efficiency.  It  is  a  problem  of  ad- 
justing the  different  parts  of  an  establishment  to  each 
other,  and  of  conforming  the  size  of  the  establishment  to 
the  market.  The  most  wisely  adjusted  plants  have  com- 
petitive advantages;  their  minimum  costs  of  production 
enable  them  to  undersell  less  efficient  rivals.  This  com- 
pels the  less  efficient  to  bestir  themselves,  to  adopt  the 
newest  and  best  or  be  left  behind. 

Deductions  from  these  simple  truths  have  led  thoughtful 
economists  to  grave  errors.  Some  have  advanced  the 
claim  that  it  is  illogical  to  prohibit  attempts  to  monopolize 
because  monopoly  is  at  once  the  goal  and  the  natural  result 
of  competition.  Competition  weeds  out  the  inefficient  and 
leaves  the  battle  to  the  strong.  This  argument  has  been 
advanced  largely  with  respect  to  industrial  establishments. 
That  this  argument  is  full  of  error  I  shall  now  proceed  to 
show. 

In  the  first  place,  it  mistakes  different  things  for  the 
same  thing.  "To  compete"  and  "to  attempt  to  monopo- 
lize" are  not  the  same,  but  antagonistic  in  principle.  The 
legitimate  competitor  would  not  build  up  his  own  house 
by  tearing  down  his  competitor's  house;  his  purpose  is 
different — it  is  to  build  a  better  house  than  that  of  his 
neighbor.     If  one  competitor  builds  a  better  ferry-boat 


Control  of  Trusts  613 

* 

than  another  he  may  take  the  bulk  of  the  trade:  If  he 
sinks  his  competitor's  boat  or  drives  him  from  the  river 
with  a  shotgun,  again  he  will  take  the  trade.  It  will  be 
admitted,  however,  that  these  methods  of  enlarging  trade 
differ.  An  "attempt  to  monopolize"  is  an  attempt  to 
eliminate  competition.  Except  in  a  very  few  instances  of 
large  fixed  capital  industrial  monopolies  are  artificial  and 
obtained  by  predatory  methods.  To  use  the  wording  of 
Professor  A.  A.  Young,  "The  contention  that  'to  compete' 
and  'to  attempt  to  monopolize'  are  synonymous  is  clearly 
unsound.  They  are  definitely  antagonistic  in  princi- 
ple." l 

Those  who  advocate  the  above  view  still  /adhere  to  the 
antiquated  doctrine  that  monopoly  is  the  final  limit  of  all 
so-called  institutions  of  increasing  returns.  And  this  in 
spite  of  the  fact  that  for  fifteen  years  it  has  been  estab- 
lished that  the  limit  of  diminishing  costs  is  the  point  of 
best  proportionality  and  not  that  of  monopoly. 

12.  Common  Law  on  Restraint  of  Trade. — The  purpose 
of  restraint  of  trade  is  to  monopolize  or  to  attempt  to 
monopolize.  The  common  law  has  held  that  contracts 
for  this  purpose  are  illegal  and  non-enforcible.  Reasonable 
restraints,  however,  have  been  permissible.  English  courts 
have  held  that  where  the  purpose  of  a  contract  is  the  pro- 
tection of  one's  own  business,  it  is  legal  even  though  it 
seriously  hampers  competition.  On  the  whole,  common- 
law  cases  have  declared  illegal  contracts  which  act  to  the 
detriment  of  a  third  party.  Public  opinion  is  and  has 
been  antagonistic  to  combination.  The  general  trend  of 
public  opinion  and  of  the  courts  has  been  to  the  doctrine 
that  combination  has  hurtful  powers  not  possessed  by  the 
1  Journal  of  Political  Economy,  vol.  23,  p.  215. 


614  Introduction  to  Economics 

individual  acting  alone.  It  has  been  held  that  certain 
acts  are  legal  for  an  individual,  but  that  these  same  acts 
would  be  illegal  if  done  in  combination  with  others.  It  is 
significant  that  in  the  past  particular  interest  has  been 
attached  to  the  rights  of  individual  litigants  rather  than 
to  the  rights  of  the  general  public.  To-day  emphasis  falls 
upon  the  point  that  the  community  must  be  protected 
from  unfair  practices. 

13.  Laissez-Faire  and  Control. — The  doctrine  that  the 
government  should  keep  its  hands  off  business  relations 
was  good  for  its  time  and  place,  but  changing  conditions 
have  rendered  it  obsolescent.  In  a  community  of  small 
business  concerns  laissez-faire  vivifies  a  healthful  rivalry  in 
serving  the  public.  But  modern  methods  of  industrial 
warfare  under  the  rule  of  laissez-faire  would  vitiate  the 
forces  of  natural  economic  laws  and  render  monopoly  con- 
trol intolerable.  The  government  must  define  and  enforce 
the  proper  limits  of  industrial  enterprise.  Laws  unenforced 
are  but  pious  declarations  of  principle.  The  doctrine  of 
laissez-faire  had  as  its  goal  the  protection  of  property,  the 
freedom  of  person,  and  the  stimulation  of  production. 
"To  let  alone"  was  regarded  a  fit  and  proper  means  of 
guarding  the  people's  interests. 

Conditions  differ,  for  to-day  monopoly  threatens  the 
people's  interests.  To  protect  social  interests  we  must 
have  the  regulating  power  of  law.  "The  official  who  re- 
strains the  plundering  monopoly,  preserves  honest  wealth, 
and  keeps  open  the  field  for  independent  enterprise  does 
on  a  grand  scale  something  that  is  akin  to  the  work  of  the 
watchman  who  patrols  the  street  to  preserve  order  and 
arrest  burglars."1  The  old  doctrine  of  laissez-faire  and 
1  John  Bates  Clark,  Essentials  of  Economic  Theory,  p.  385. 


Control  of  Trusts  615 

the  new  idea  of  restraint  are  one  and  the  same  in  essence 
and  purpose.  The  former  would  not  have  competition 
destroyed:  The  latter  would  have  competition  preserved. 
Both  adhere  to  the  faith  that  natural  development  de- 
pends on  competition. 

14.  The  Sherman  Anti-Trust  Law. — The  common-law 
proved  inadequate  to  deal  with  the  unfair  practices  of 
monopolies  and  trusts.  Restraints  of  trade  were  treated 
as  questions  of  private  rights  and  the  broader  aspects  of 
public  policy  were  virtually  ignored.  The  public,  there- 
fore, was  not  behind  the  law,  making  sure  its  enforcement. 
Meanwhile,  large  combinations  were  extending  their  influ- 
ence and  the  people  felt  the  pressure  of  their  power.  Con- 
flicts of  interest  as  between  producers  and  consumers  were 
difficult  of  adjustment,  due  to  the  complex  economic  prob- 
lems in  modern  industry  which  neither  side  understood. 
Nor  were  the  courts  possessed  of  clear  vision.  The  cases, 
for  the  most  part,  involved  complex  economic  problems, 
and  lawyers  rather  than  economists  decided  them. 

An  awakened  public  opinion  first  turned  against  the 
railroads  and  the  Interstate  Commerce  Act  of  1887  was 
passed.  This  was  followed  by  the  Sherman  Act  of  1890. 
The  purpose  of  this  act  was  to  protect  the  public  against 
the  evils  of  trusts.  The  act  declared  against  contracts,  com- 
binations, or  conspiracies  in  restraint  of  trade  or  commerce. 
It  provided  that  persons  who  monopolize  or  attempt  or 
conspire  to  monopolize  any  part  of  the  trade  or  com- 
merce between  states,  or  with  foreign  countries,  shall  be 
punished.  The  punishment  for  disobeying  the  law  may 
be  by  fine  (not  more  than  $5,000),  or  imprisonment 
(not  more  than  one  year),  or  both,  in  the  discretion 
of  the  court. 


616  Introduction  to  Economics 

15.  The  Prevention  of  Trusts. — In  the  last  several  years 
no  little  has  been  said  and  written  on  "trust-busting." 
Many  thoughtful  persons  believe  that  under  our  laws 
existing  trusts  cannot  be  destroyed  and  competition  re- 
stored. Others  believe  that  the  restoration  of  competition 
is  possible  in  the  fields  now  dominated  by  trusts.  The 
fact  is  that  vigorous  enforcement  of  anti-trust  laws  are  too 
recent  to  warrant  a  conclusion  on  the  restoration  of  com- 
petition. The  Sherman  Law  was  little  more  than  a  dead 
letter  prior  to  191 1.  The  methods  by  which  the  law  was 
enforced  were  too  gentle  to  test  its  power.  The  punish- 
ment of  offenders  consisted  of  a  light  fine  rather  than 
imprisonment.  It  was  good  business  for  corporations  to 
break  the  law.  If  one  is  fined  $5  for  an  act  which  profits 
him  $10,  it  is  good  business  to  perform  the  act.  These 
fines  have  been  much  like  the  student's  matriculation  fee 
— a  necessary  nuisance,  but  when  paid  it  is  settled  once 
for  all.  It  has  rarely  happened  that  a  trust  has  been  pun- 
ished more  than  once.  Other  trusts  escaped  fine,  merely 
being  informed  that  their  acts  were  illegal.  Trust  activi- 
ties are  little  restrained  under  such  enforcement.  Not  the 
terminology  of  the  law  but  the  rigor  of  its  enforcement  is 
the  significant  thing.  Trusts  fear  but  little  the  possibility 
of  a  fine,  but  the  lawbreaker  does  fear  the  jail. 

16.  The  Standard  Oil  Case. — A  few  noteworthy  cases 
having  to  do  with  holding  companies  were  tried  under  the 
Sherman  Act.  Among  these  the  Standard  Oil  case  of  19 11 
is  typical.  The  Standard  had  bought  many  of  the  sub- 
sidiary companies  and  had  established  outright  a  number 
of  others.  The  whole  company  was  firmly  knit  together 
and  the  majority  stock  was  controlled  by  a  small  group 
of  closely  associated  individuals.     How  did  the  court  pro- 


Control  of  Trusts  (517 

ceed  to  dissolve  the  combination  and  restore  competition 
among  the  several  companies? 

The  court  decreed  that  the  stock  in  the  different  con- 
stituent companies  should  be  divided  pro  rata  among  the 
stockholders  of  the  holding  company.  If,  for  example.  A, 
B,  and  C  each  owned  one-third  of  the  stock  of  the  Stand- 
ard Oil  or  holding  company,  they  would  each  come  to 
own  one-third  of  the  stock  of  each  subsidiary  company. 
The  court  permitted  the  same  persons  to  be  elected  as 
officers  or  directors  of  two  or  more  of  the  subsidiary  com- 
panies. Yet  the  officers  of  the  different  companies  were 
enjoined  from  making  any  agreements  among  themselves 
to  restrain  trade.  The  court  prohibited  some  other  formal 
means  for  securing  unity  of  control.  The  court  left  pre- 
cisely the  same  community  of  interest,  the  same  persons 
owning  jointly  the  same  properties.  And  thus  the  holding 
company  was  "busted"  and  the  Sherman  Law  enforced. 

17.  Prevention  or  Destruction. — The  prevention  of 
trusts  would  be  far  easier  than  the  destruction  of  existing 
trusts.  The  courts  seem  to  be  hindered  by  precedent  and 
form.  Certain  trusts  have  dodged  the  law  and  main- 
tained their  existence  by  changing  the  form  of  their  organ- 
ization, although  in  essence  they  have  remained  the  same. 
The  purpose  of  the  men  who  conspire  under  the  protec- 
tion of  a  legal  form  remains  unchanged.  To  quote  from 
Durand's  excellent  little  book:1  "Difficult  as  it  may  be 
to  break  up  trusts  already  formed  and  firmly  knit  together, 
there  seems  no  serious  difficulty  in  preventing  by  law  the 
formation  of  new  trusts.     Indeed,  it  is  noteworthy  that 

1  The  Trust  Problem,  pp.  39-40.  This  writer  is  particularly  indebted 
to  Dr.  Durand's  book  for  the  treatment  of  several  of  the  topics  here 
discussed,  especially  the  next  topic — "Trust  Regulation." 


618  Introduction  to  Economics 

since  the  government  began  somewhat  actively  to  bring 
proceedings  under  the  Sherman  Anti-Trust  Act,  almost  no 
trusts  have  been  organized.  If  a  proper  control  over  the 
organization  of  corporations  and  over  their  acquisition  of 
corporations  and  over  their  acquisition  of  property  and 
securities  were  exercised  by  the  states  and  by  the  Federal 
Government,  the  attempt  to  organize  new  trusts  would  be 
nipped  in  the  bud." 

18.  Trust  Regulation. — A  policy  of  regulation  is  based 
upon  the  existence  of  trusts  and  it  assumes  that  they  are 
to  continue.  We  have  seen  that  no  blanket  principle  can 
apply  to  all  trusts;  some  few  trusts  (public  utilities  and 
natural  monopolies  are  not  trusts)  having  large  fixed  capi- 
tal are  in  nature  possessed  of  monopoly  power  and  should 
be  regulated  accordingly.  As  for  railroads,  even  the  courts 
have  urged  that  the  common-law  principle  of  allowing  con- 
tracts in  "reasonable"  restraint  of  trade  is  necessary  and 
desirable.1  A  new  judicial  distinction,  doubtless  a  trouble- 
some and  unworkable  one,  has  come  to  the  fore  within  the 
last  few  years.  It  is  that  "good  trusts"  are  to  be  distin- 
guished from  "bad  trusts."  The  latter  to  be  restrained  and 
the  former  to  be  upheld  in  its  agreements  upon  "  reasonable  " 
prices  and  other  contracts  which  will  not  "unduly"  restrain 
trade.  Consumers  regard  all  trusts  as  bad;  interested  par- 
ties pronounce  them  good.  Who  is  the  judge?  Right  here 
lies  the  difficulty.  This  policy  requires  the  government  to 
act  as  judge  and  its  judgment  must  be  based  upon  fact. 

Contemplate  the  enormousness  of  the  task  which  the  gov- 
ernment must  assume  and  the  matter  will  appear  at  once 
impracticable,  if  not  unworkable.  Government  regulation 
upon  the  basis  of  "good"  will  compel  the  government  vir- 

1  166  W.  S.  32Q;  171  \V.  S.  567. 


Control  of  Trusts  619 

tually  to  prescribe  what  are  to  be  reasonable  prices  and 
profits.  The  machinery  for  government  regulation  must 
be  vast  and  expensive.  Investigation  of  the  facts  must  be 
continuous,  for  a  good  trust  may  become  bad  over  a  week's 
end.  The  government  must  get  frequent  data,  must  keep 
up  with  changing  costs  of  raw  materials,  labor,  obsoles- 
cence, and  new  investments.  The  complex  principle  of 
joint  costs  must  not  escape  attention.  The  investigation 
of  to-day  will  be  antiquated  by  the  changing  demand  of 
to-morrow. 

The  accounting  problem  is  not  least  among  the  diffi- 
culties. The  Interstate  Commerce  Commission  has  had 
its  full  quota  of  difficulty  in  its  attempt  to  secure  a  work- 
able accounting  system  in  one  line  of  industry.  In  this  it 
has  not  wholly  succeeded  after  painstaking  effort,  although 
its  problem  is  simple  in  comparison  with  that  of  securing 
satisfactory  results  among  a  vast  number  of  trusts,  differing 
in  nature  and  necessarily  in  systems  of  accounting.  Good 
accountants  are  scarce  and  their  services  costly,  yet  thor- 
ough regulation  will  require  double  work  in  accounting. 
The  trust  must  have  its  accountants  in  order  to  keep  its 
business  straight,  and  as  a  basis  for  its  management  and 
price  policy.  The  government  must  have  its  corps  in 
order  to  render  judgment  on  the  work  of  the  trust.  The 
complicated  machinery  and  double  work  required  for  any- 
thing approaching  thorough  regulation  would  offset  the 
reason  given  for  allowing  the  good  trust  to  exist — the  rea- 
son of  efficiency.  Furthermore,  if  "good"  be  the  criterion 
for  a  trust's  existence,  it  must  follow  that  any  combination 
which  meets  the  test  must  be  allowed  to  form  itself  into  a 
trust  and  its  existence  protected  for  such  time  as  it  be- 
haves itself.     Prevention  is  the  safer  method. 


620  Introduction  to  Economics 

19.  Need  of  Further  Legislation. — The  Sherman  Law 
was  worded  in  terms  so  general  as  to  permit  of  a  variety 
of  interpretations.  The  term,  "restraint  of  trade,"  was  a 
vital  part  of  the  law,  but  it  was  nowhere  defined  in  the 
statute.  In  rendering  the  opinion  in  the  Standard  Oil  case 
Chief- Justice  White  argued  that  Congress  did  not  define 
the  term  in  order  "to  leave  it  to  be  determined  by  the 
light  of  reason."  He  said  that  if  literally  and  narrowly 
interpreted  it  would  deny  the  right  to  contract  as  to  sub- 
jects embraced  in  interstate  trade.  Thus  it  would  tend 
to  restrain  rather  than  promote  interstate  trade.  But  in 
the  dissenting  opinion  Justice  Harlan  said  that  "...  Con- 
gress prohibited  every  contract,  combination,  or  monopoly 
in  restraint  of  commerce,  it  prescribed  a  simple,  definite 
rule  that  all  could  understand.  ..." 

Also,  differences  of  opinion  arose  as  to  whether  the  law 
applied  to  labor-unions  and  to  railway  combinations.  A 
narrow  interpretation  made  it  a  weapon  against  strikes 
and  boycotts.  This  was  not  in  keeping  with  the  spirit  of 
the  act,  and  was  enough  to  call  for  an  amendment  of  the 
law.  Again,  in  its  application  to  railroads  it  overlapped 
the  Interstate  Commerce  Act.  Railroads  are  natural 
monopolies;  rate  agreements  are  inevitable,  and  therefore 
call  for  regulation  rather  than  enforced  competition. 
These  facts  called  for  a  revision  of  the  law  or  for  further 
legislation  to  maintain  competition  in  cases  of  trusts  as 
such. 

20.  Unfair  Methods  of  Competition. — The  purpose  of 
this  paragraph  is  to  give  an  idea  of  the  nature  of  unfair 
methods  of  competition  in  order  that  we  may  appreciate 
a  leading  problem  which  the  legislation  of  19 14  attempted 
to  solve.  We  shall  briefly  enumerate  some  unfair  methods 
which  are  characteristic  of  all  such  practices. 


Control  of  Trusts  621 

One  prominent  American  corporation1  is  noted  for  the 
ingenious  methods  which  it  used  in  overcoming  competi- 
tion. It  used  ''fighting  brands"  which  were  sold  in  com- 
petition with  the  goods  of  other  companies  at  or  below  the 
cost  of  production.  Meanwhile  it  did  not  grow  poor, 
because  it  was  securing  handsome  profits  on  brands  out- 
side of  the  fighting  arena.  There  were  many,  among  them 
some  labor-unions,  who  refused  to  patronize  this  so-called 
trust.  Thereupon  the  corporation  in  question  bought 
up  twenty  or  more  concerns  and  ran  them  as  supposedly 
independents.  These  concerns  went  through  the  outward 
forms  of  competition  with  their  owner  and  were  for  a  time 
well  supported  by  the  opponents  of  the  trust.  Other 
methods  employed  by  this  concern  were  those  of  forming 
exclusive  contracts  with  dealers  who  sold  its  products, 
whereby  such  sellers  were  not  to  receive  supplies  from  com- 
peting companies.  It  furthermore  placed  the  business  of 
its  competitors  under  secret  espionage. 

Such  practices  are  destructive,  never  constructive. 
Their  purpose  and  effect  is  to  destroy  the  business  of  others. 
Oftentimes  a  smaller  corporation,  threatened  with  ruin  be- 
cause of  the  unscrupulous  procedure  of  a  successful  rival, 
will  wish  to  sell  its  holdings  if  only  at  a  nominal  sum. 
But  at  least  one  successful  rival  boasts  thus:  "We  are  re- 
ceiving overtures  to  buy  out  opposition.  We  will  not  buy 
them  out;  we  knock  out."  In  a  criminal  indictment2 
brought  against  the  company  that  made  the  above 
boast  the  following  charges,  among  others,  were  enumer- 
ated: (a)  Inducing,  hiring,  and  bribing  employees  of 
competitors  to  reveal  the  secrets  of  their  business;  (b) 
bribing  common  carriers,   telegraph  and  telephone  com- 

1  Meyer  Jacobstein's  The  Tobacco  Industry  in  the  United  States. 
Columbia  University  Studies,  1907. 

'Indictment  presented  February  22,  1912.  Federal  Reporter,  vol.  201, 
pp.   699-705. 


622  Introduction  to  Economics 

panies,  to  reveal  secrets  relative  to  the  carriage  of  competi- 
tors' goods;  (c)  falsifying  to  banks  to  the  injury  of  com- 
petitors in  order  to  prevent  their  securing  needed  funds; 
(d)  also  falsifying  to  prospective  purchasers  regarding  the 
merits  of  the  competitors'  goods;  (e)  instructing  its  agents 
how  to  remove  essential  parts  and  thus  cause  a  speedy 
breakdown  of  the  competitors'  product;  (/)  cutting  prices 
to  a  prospective  buyer  of  a  competitor,  or  taking  a  com- 
petitor's product  in  exchange  and  advertising  it  as  ''junk" 
"For  Sale  at  Thirty  Cents  on  the  Dollar";  (g)  offering 
"knockers"  or  a  defective  product,  which  it  constructed 
in  imitation  of  the  competitor's  product,  and  using  the 
same  to  demonstrate  the  inferiority  of  the  rival's  goods; 
(h)  bringing  harassing  lawsuits  against  competitors,  buy- 
ing off  their  agents,  and  so  forth. 

21.  The  anti-trust  legislation  of  1914  consists  of  two 
statutes,  the  Federal  Trade  Commission  Act  and  the  Clay- 
ton Act  ("an  Act  to  supplement  existing  laws  against  un- 
lawful restraints  and  monopolies  and  for  other  purposes"). 
The  President  signed  the  first  September  26,  19 14,  and  the 
last  twenty  days  later.  In  the  preceding  national  election 
the  Progressive  party,  led  by  Mr.  Roosevelt,  stood  for  the 
policy  of  "monopoly-accepted-and-regulated";  the  Repub- 
lican party,  led  by  Mr.  Taft,  stood  for  the  policy  of  "mo- 
nopoly-prosecuted"; the  Democratic  party,  led  by  Mr. 
Wilson,  stood  for  the  policy  of  "  competition-maintained- 
and-regulated." 

These  acts  are  but  two  parts  of  the  same  legislation 
and  are  to  be  considered  together.  The  Trade  Commission 
Act  embodies  the  provisions  against  unfair  methods  of 
competition  (which  logically  belongs  in  the  Clayton  Act), 
otherwise  it  provides  the  machinery  and  methods  to  make 
the  Clayton  Act  effective. 

Unfair  methods  of  competition,  whether  on  the  part  of 


Control  of  Trusts  623 

firms  or  individuals,  are  declared  unlawful.  As  in  the 
Sherman  Act,  "unfair  methods"  are  not  defined.  This 
term  is  so  vague  that  business  men  must  be  left  in  doubt 
at  times  as  to  the  legality  of  their  acts.  Yet,  as  above 
pointed  out,  to  specifically  define  what  are  illegal  acts 
would  provide  the  unscrupulous  a  means  of  disobeying  the 
spirit  of  the  law  while  obeying  the  letter.  However,  a  wise 
provision  is  inserted  which  protects  the  well-meaning  law- 
breaker. It  is  that  no  penalty  shall  be  given  for  the  initial 
offense.  The  Trade  Commission  and  the  courts  are,  in  the 
light  of  reason,  to  interpret  as  to  the  fairness  or  unfairness 
of  methods  as  cases  arise. 

22.  The  Federal  Trade  Commission. — A  function  of  the 
commission  is  to  be  "smelling  around  all  the  time  for 
rats."  And  when  unfair  practices  are  found  it  is  signifi- 
cant that  the  proceedings  against  such  practices  begin 
with  the  commission.  The  commission  is  not  obliged  to 
take  action,  and  neither  the  court  nor  a  prosecuting  attor- 
ney can  take  the  initiative,  therefore  the  unscrupulous 
trust,  in  matters  of  unfair  competition,  is  at  the  mercy  of 
the  commission.  It  is  compelled  to  proceed  only  "if  it 
shall  appear  to  the  commission  that  a  proceeding  by  it  in 
respect  thereof  would  be  to  the  interest  of  the  public." 
Many  argue  that  the  law  is  weakened  by  virtue  of  leaving 
its  enforcement  to  a  body  who  are  not  compelled  to  act. 
None  the  less,  the  provision  seems  wise  in  fight  of  the  end- 
less toil  which  would  be  occasioned  if  proceedings  were 
brought  in  all  cases — the  trivial  as  well  as  the  important. 
The  commission  nips  in  the  bud  needless  litigation  by 
issuing  orders  to  offenders  to  discontinue  unfair  practices. 
In  case  its  orders  are  disobeyed,  application  is  made  direct 
to  the  circuit  court  of  appeals  for  enforcement.     In  this 


624  Introduction  to  Economics 

particular  the  Federal  Trade  Commission  is  less  powerful 
in  its  field  than  is  the  Interstate  Commerce  Commission 
in  the  field  of  transportation,  for  since  1906  a  penalty  has 
been  provided  for  disobeying  its  orders. 

But  it  is  a  problem  of  deep  significance  as  to  whether  or 
not  a  commission  is  strengthened  by  giving  it  power  to 
enforce  its  commands.  Though  used  in  a  different  con- 
nection I  shall  use  the  wording  of  President  Hadley  to 
make  clear  this  point:  "In  the  days  of  its  (the  Massachu- 
setts Railroad  Commission)1  most  successful  operation  it 
had  practically  no  power  except  the  power  to  report;  but 
its  reports  showed  such  a  clear  understanding  of  the  points 
at  issue  that  they  were  accepted  as  authority  by  impartial 
men  on  both  sides.  The  Interstate  Commerce  Commis- 
sion was  in  some  respects  modelled  upon  the  Massachusetts 
commission,  and  such  success  as  it  has  enjoyed  (President 
Hadley  wrote  this  in  1896)  has  been  based  on  its  power  of 
applying  sound  economic  principles  to  difficult  cases.  It 
is  true,  though  it  sounds  paradoxical,  that  the  power  of 
these  commissions  is  lessened  by  increasing  their  powers. 
They  are  engaged  in  building  up  new  laws,  new  traditions, 
and  new  methods  of  business,  where  it  is  absolutely  essen- 
tial that  their  reasoning  should  command  the  assent  of 
clear-headed  men  on  both  sides.  When  they  cease  to  rely 
on  their  reason  and  fall  back  on  authority,  they  lose  the 
educational  power  which  is  the  source  of  their  dominant 
influence."2 

The  commission,  as  a  body  of  expert  investigators  into 
the  facts  of  unfair  practices  injurious  to  the  public  inter- 
est, is  easily  the  important  feature  of  the  new  legislation, 
for  indeed  the  law  as  such  embodied  little  not  found  in 

1  Parenthesis  mine.  J  Hadley's  Economics,  p.  177. 


Control  of  Trusts  625 

the  Sherman  Act.  The  findings  of  the  commission,  with 
an  unimportant  exception,  are  treated  by  the  court  as  con- 
clusive. Its  powers  for  investigation  (except  in  cases  of 
banks  and  common  carriers)  are  unlimited.  It  can  de- 
mand and  examine  the  books  and  papers  of  corporations; 
it  can  command  witnesses  to  appear  and  testify.  It  is 
significant  that  the  law  makes  witnesses  immune  from 
prosecution  on  their  testimony.  It  can  require  annual 
reports  or  special  reports  on  any  subject-matter  it  desires 
from  all  companies  engaged  in  interstate  or  foreign  com- 
merce. These  reports  will  reveal  a  vast  amount  of  infor- 
mation, previously  unobtainable,  and  of  inestimable  im- 
portance in  dealing  with  the  trust  problem. 

The  law  forbids  the  commission's  making  known  "trade 
secrets"  and  names  of  customers;  otherwise  it  is  at  liberty 
to  give  its  findings  publicity.  A  chief  characteristic  of 
Professor  Jenks's  The  Trust  Problem,  first  published  in 
1900,  was  his  insistence  upon  publicity  as  the  primary 
force  in  the  control  of  trusts.  Public  sentiment,  however, 
was  not  then  ripe  for  such  a  measure,  and  trust  officials  pre- 
ferred to  hold  council  behind  closed  doors.  But  the  wisdom 
of  a  policy  of  publicity  was  apparent,  and  it  has  grown 
gradually  into  public  favor.  The  corporations  themselves 
are  coming  more  and  more  to  adopt  the  policy.  Many  of 
them  upon  their  own  initiative  are  making  full  reports  to 
the  public.  Public  and  business  sentiment  is  ripe  for  a 
full  measure  of  publicity  and  the  policy  has  taken  the 
form  of  law.1     It  is  fortunate  that  the  Federal  Trade  Com- 

1  The  Bureau  of  Corporations  (established  in  1903)  was  a  body  of  expert 
investigators,  but  could  not  determine  what  information  it  might  make 
public.  Probably  valuable  findings  have  not  been  published.  In  its  field 
the  Interstate  Commerce  Commission,  through  publicity,  has  rendered  in- 
valuable aid. 


626  Introduction  to  Economics 

mission,  with  its  unlimited  opportunity  to  observe  and 
investigate  the  trusts,  should  have  this  power.  Constant 
touch  with  these  problems  will  eminently  fit  the  commis- 
sion to  advise  with  respect  to  needed  trust  legislation. 

Returning  to  other  features  of  the  law,  it  is  noteworthy 
that  labor-unions  and  "agricultural  or  horticultural"  asso- 
ciations are  not  covered  by  these  statutes. 

23.  Holding  Companies  and  Interlocking  Directorates. 
-The  Clayton  Act  declares  it  illegal  for  one  company  to 

buy  the  stock  of  another  when  it  would  lessen  competition 
or  tend  to  monopoly.  This  is  but  a  repetition  of  previous 
law  against  the  holding  company.  A  famous  decision  (the 
Northern  Securities  decision)  as  early  as  1904  made  it 
clear  that  such  cases  fall  definitely  within  the  scope  of  the 
Sherman  Act. 

The  law  forbids  interlocking  directorates  (the  same  per- 
sons acting  as  directors  of  different  corporations)  in  large 
banks  and  in  other  corporations  whose  capital,  surplus, 
and  undivided  profits  aggregate  over  $1,000,000.  This 
portion  of  the  act  has  met  with  public  approval.  May  it 
not  be,  however,  that  we  give  too  much  emphasis  to  the 
monopoly  power  of  interlocking  directorates,  and  too  little 
emphasis  to  the  common  ownership  of  corporations?  A 
safer  provision,  though  one  for  which  public  sentiment  is 
not  ripe,  would  be  to  deny  to  private  ownership  the  privi- 
lege to  form  monopoly.  None  the  less,  this  phase  of  the 
law  has  much  promise  of  good. 

24.  The  Webb-Pomerene  Act. — Both  the  Sherman  Act 
of  1890  and  the  Clayton  Act  of  1914  forbid  combination  in 
restraint  of  trade,  but  in  so  doing  they  not  infrequently 
forbid  combination  in  promotion  of  trade.  Suppose  that 
Jones,  Smith,  and  Brown  are  competitors  in  the  oil  busi- 


Control  of  Trusts  627 

ness;  the  first  two  combine  and  institute  certain  so-called 
unfair  methods  for  mutual  advantage  in  promoting  the 
trade.  The  combination  effects  economies,  and  Brown  is 
outdistanced  in  the  output,  the  service,  and  the  price. 
Two  results  follow:  The  trade  of  the  combination  is  pro- 
moted, while  that  of  Brown  is  restrained.  The  Sherman 
and  the  Clayton  laws  play  their  part  by  coming  to  the  aid 
of  Brown,  but  in  so  doing  they  hamper  the  promotion  by 
Smith  and  Jones.  If  to  restrain  one  interest  is  to  promote 
another,  it  follows  that  to  remove  the  cause  of  the  one  is 
to  eliminate  the  cause  of  the  other. 

The  Webb-Pomerene  Act  of  1918  appears  to  stand  in 
striking  contrast  with  the  two  acts  above  named.  The 
purpose  of  the  law  is  to  promote  export  trade  by  permitting 
combinations  among  competitors  for  the  sale  of  goods  in 
foreign  markets.  The  law  limits  itself  to  foreign  trade;  it 
would  permit  no  league  of  competitors  whose  power  would 
affect  trade  in  the  United  States.  This  law  stands  for 
combination,  while  the  Sherman  and  Clayton  Acts  stand 
for  competition;  it  is  in  this  sense  that  the  law  of  1918 
appears  in  contrast  with  the  other  two.  Considering,  how- 
ever, that  the  Webb-Pomerene  law  is  applicable  only  in 
the  foreign  field,  may  it  not  be  that  the  three  laws  are  con- 
ducive to  the  same  ends? 

No  satisfying  answer  can  be  given  this  important  ques- 
tion within  the  space  at  my  disposal.  Suffice  it  to  say 
that  exporting  combinations  can  amass  the  large  capital 
which  is  necessary  to  enable  the  small  as  well  as  the  large 
producers  to  participate  in  foreign  trade.  Competition 
must  be  had  in  the  home  market  if  the  small  producer 
share  his  due  portion  of  trade;  exporting  combinations 
must  be  had  if  the  small  producer  share  his  due  portion 


628  Introduction  to  Economics 

of  foreign  trade.  The  American  policy  favors  a  fair  field 
for  producers  large  and  small.  There  is  a  fighting  chance 
for  all  producers  in  domestic  trade  only  when  competition 
is  maintained.  The  difficulties  of  establishing  trade  in 
foreign  markets  are  so  great  as  to  deny  the  privilege  to  all 
excepting  those  who  possess  large  capital. 

The  primary  advantage  of  export  combinations  will  be 
found  in  the  power  of  great  capital.  This  advantage  is 
primary  because  of  the  large  capital  that  is  required  to 
establish  trade  in  a  foreign  market.  In  some  cases  we  shall 
be  forced  practically  to  create  a  new  demand  for  our  goods. 
American  tobacco,  for  instance,  was  introduced  into  cer- 
tain markets  only  after  an  extensh  e  educational  campaign 
that  had  to  break  down  religious  scruples  and  to  create  the 
taste  for  tobacco.  J.  W.  Jenks  says:1  "One  may  question 
the  value  to  those  peoples  of  this  'educated  taste':  one 
cannot  question  the  skill  and  power  needed  to  accomplish 
the  result."  Strong  competition  will  be  met  in  the  foreign 
market;  we  must  establish  connections,  maintain  selling 
agencies,  employ  the  ablest  salesmen,  and  advertise  exten- 
sively. These  necessary  outlays  cannot  be  met  without 
the  possession  of  very  large  capital. 

The  three  laws  in  question  declare  for  domestic  competi- 
tion and  for  combination  in  the  foreign  market.  Shielded 
from  restraint  at  home  and  aided  by  combination  in  the 
export  market,  the  individual  producer  is  enabled  to  share 
the  benefits  of  both  markets.  Seeing  that  two  of  these 
laws  declare  for  competition  while  the  third  favors  com- 
bination, the  superficial  will  jump  to  the  conclusion  that 
these  laws  stand  forth  in  bold  contrast.  They  are,  how- 
ever, not  antagonistic  in  principle.     They  jointly  declare 

1  The  Trust  Problem,  p.  75. 


Control  of  Trwts  629 

the  public  policy — that  of  maintaining  at  home  the  kind 
of  industrial  society  we  want,  a  competing  chance  in  a 
fair  field.  Meanwhile  provision  is  made  for  the  most  effec- 
tive marshalling  of  our  forces,  so  that  each  and  all  may 
share  the  trade  in  foreign  markets. 

The  question  may  arise  as  to  the  reaction  this  law  may 
cause  among  foreigners.  Will  they  welcome  the  fact  that 
America,  while  refusing  to  tolerate  combinations  in  trade 
at  home,  will  advocate  combinations  for  the  capture  of 
foreign  trade  ?  To  the  degree  that  the  foreigner  will  study 
this  law  at  all,  he  will  view  it  from  the  point  of  view  of 
his  own  personal  interest.  The  foreign  consumer  will 
be  the  ultimate  purchaser  of  our  exported  products,  and 
he  will  probably  not  be  offended  at  our  arrangement  to 
give  him  the  best  in  service,  the  first  in  quality,  and  the 
lowest  in  price.  Combination  will  enable  us  to  do  these 
things.  Combination  in  restraint  of  trade  at  home  tends 
to  monopolize  the  domestic  market.  Combinations  on  our 
part  to  enter  the  foreign  market  will,  on  the  contrary,  but 
accentuate  competition.  For  the  other  nations  of  the 
world  will  compete  with  America  for  the  same  trade,  will 
marshal  their  forces  and  exert  every  effort  in  the  attempt 
to  underbid  us  and  capture  the  foreign  market. 

The  Webb-Pomerene  Act  is  new  and  patience  will  be 
required  that  it  may  have  a  fair  test.  Doubtless  imper- 
fections will  be  exposed  in  this  law  and  amendments  made, 
but  it  marks  the  beginning  of  a  new  policy  toward  export 
trade.  Time  alone  will  test  the  wisdom  of  this  policy; 
meanwhile  its  results  will  be  watched  with  deepest  interest. 

25.  Exercises. — 1.  Define  the  following:  trust,  pool, 
holding  company,  merger.  State  the  characteristic  fea- 
tures of  each. 


630  Introduction  to  Economics 

2.  Should  a  fusion  be  made  of  Company  A  and  Company 
B  into  a  new  Company  C,  should  you  term  this  an  amal- 
gamation or  a  merger  ? 

If  a  fusion  is  made  of  Company  A  into  Company  B, 
would  this  be  an  amalgamation  or  a  merger  ? 

3.  Should  you  think  it  wise  for  railroads  to  form  pools? 
Defend  your  answer.  Will  the  same  arguments  you  make 
in  case  of  railroads  hold  true  in  case  of  farmers?  retail 
merchants  ?  salt  manufacturers  ? 

4.  State  some  reasons  why  the  ownership  of  less  than 
50  per  cent  of  the  stock  in  a  holding  company  may  give 
control.  (For  brief  summary  see  Gerstenberg's  Syllabus 
of  Corporation  Finance,  II,  chapter  XIII.) 

5.  Summarize  the  advantages  and  disadvantages  of 
holding  companies.     (See  Lough's  Corporation  Finance.) 

6.  Make  a  brief  of  this  case — The  Northern  Securities 
Company  vs.  U.  S.  (193  U.  S.  197). 

Ask  no  aid  from  teacher  or  librarian  in  finding  the  case. 

7.  How  may  lax  legislation  respecting  holding  compa- 
nies in  one  state  force  other  states  to  pass  lenient  laws? 

8.  Why  are  not  the  laws  more  specific,  defining  exactly 
what  is  and  what  is  not  legal,  so  that  business  men  will  be 
freed  from  all  hazards  in  their  investments  ? 

9.  "To  compete"  and  "to  attempt  to  monopolize"  are 
not  the  same,  but  antagonistic  in  principle.     Explain. 

10.  Which  one  of  the  following  views  do  you  think  to  be 
nearest  the  truth,  and  why?  (a)  The  trust  is  a  natural 
and  inevitable  outcome  of  modern  conditions  and  is  a 
distinct  economic  gain,  (b)  The  trust  is  a  result  of  special 
privileges  and  corporate  abuses,  (c)  The  trust  is  the 
greatest  invention  of  this  or  any  other  age.     (Fetter.) 

n.  What  relation  has  combination  to  large  fortunes? 
to  small  fortunes? 

12.  What  is  the  public  policy  with  respect  to  combina- 
tions with  monopoly  power  ?  Is  the  public  policy  adverse 
to  large-scale  production  as  such? 

13.  What  was  the  purpose  of  the  Sherman  Anti-Trust 
Law? 


Control  of  Trusts  G31 

14.  Is  it  better  to  prevent  the  formation  of  combinations 
in  restraint  of  trade  or  to  destroy  them  after  they  are 
formed  ?     Reasons  ? 

15.  Point  out  the  chief  difficulties  that  might  be  encoun- 
tered in  the  administration  of  a  policy  of  trust  regulation. 

16.  What  do  you  consider  the  most  important  feature  of 
the  Federal  Trade  Commission  Act  ? 

17.  Do  you  consider  the  Webb-Pomerene  Act  antagonis- 
tic in  principle  to  the  Clayton  Act  ? 

If  you  were  doing  a  small  independent  business  and 
hoped  to  reach  both  the  domestic  and  the  export  markets, 
should  you  wish  the  repeal  of  either  of  these  acts  ? 


INDEX 


acceptances,  318,  319,  327 

Act  of  1873,  the,  268 

Adams,  Prof.  B.  G.,  15 

Adams,  H.  C,  44 

Adamson  bill,  606 

advertising  waste,  570-572 

y£sop,  112 

agricultural  stage,  the,  9,  10 

agriculturist,  the,  knowledge  of,  10 

Aldrich  plan,  the,  322 

American   Civil   War,    61,    83,    90; 

destruction  in,  77;   lessons  of,  77; 

influence  of,  77-78 
American    gold    dollar,    weight   of, 

208,  215 
American  Indians,  25 
American  Steel  and  Wire  Company, 

562,  563 
American  Tobacco  Company,  608, 

621,  628 
amount,  155-156 
animals,  domestication  of,  6,  7 
antitrust   legislation   of    1914,  622- 

623 
Arkwright's  water-frame,  45 
Armour,  P.  D.,  459 
Asiatic  Turkey,  439 
"assignats,"  227 

"bad  trusts,"  618 

Ball,  John,  32,  33 

bank,  a,  operations  of,  292-294 

bank  credits,  287-288 

bank  interest,  variation  of,  492 

bank-notes,  302 

Bank  of  France,  the,  306-310;  pub- 
lic duty  of,  307;  specie  reserve  of, 
307-308;  deposits  of,  308;  branch 


banking  of,  308-310;  elasticity  of, 

310 
bank  of  the  United  States,  311 
banking,  and  foreign  trade,  321-322 
banking,   decentralization   of,   317- 

banking    facilities,    distribution    of, 

320-321 
banking,   prior   to   national   banks, 

310-311 
banks,  as  reservoirs  of  capital,  288; 

functions  of,  305;  foreign  branches 

of,  328 
bank's  liabilities,  a,  value  of,  294 
barbarian  migrations,  16 
barter  and  need  for  money,  197-198 
Bastiat,  Frederic,  107,  434 
Bentham,  Jeremiah,  59 
Bethlehem  Steel  Company,  the,  187 
bimetallism,  255-256,  258,  259,  260, 

261;      arguments    for,     261-264; 

arguments  against,  264-266 
Bishop  Latimer,  34-35 
Black  Death,  the,  31;  effects  of,  31, 

32 
Bland-Allison  Act  of  1877,  the,  268 
bond,  the  present  worth  of  a,  497- 

498 
borrowers,  513-518 
Bowen,  F.,  404 
brassage,  208 

broad  market,  demand  in,  559-560 
broken-pane  philosophy,  434-435 
Bryan,  W.  J.,  271,  272 
business,     foresight     in,     550-551; 

training  for,  551,  552 
business   man,   the   hazard   of   the, 

611-612 


633 


634 


Index 


buyers  and  sellers,  unrevealed  price 
limits  of,  159-160 

Cairnes,  John  E.,  257,  402 

Calais,  30 

Canterbury  Tales,  31 

capital,  and  wealth,  85-86;  defined, 
467-468,  471,  472,  474,  479,  480, 
481,  482,  535;  contrasted  with 
wealth,   482-483,  484,  485,   Soi, 

5f3 

capital  items,  295-296 

capitalists,  70 

capitalization,  495,  499;   and  inter- 
est, 496,  497 
Carnegie  Steel  Co.,  577 
Cartwright's  power-loom,  45 
Carver,  T.  N.,  574 
cash,  defined,  204 
centralization,  in  banking,  306 
centralized  banking,  306 
changes  affecting  wage-earners,  48- 

49 
charters,  535,  536,  537 
Chase,  Secretary,  312 
Chaucer,  31 

checks,  payments  by,  301-302 
classes,  inequalities  of,  574-575 
Clayton   Act,    the,    547,    622,    626, 

627 
clearing-houses,  agency  of,  300-301 
coinage,    205-206;     free,    206-207; 

unlimited,  207;  gratuitous,  207 
Coinage  Act  of  1853,  the,  268 
coins,  selection  of,  252-253 
Colbert,  38 
Colbertism,  38 
collateral,  298 
collective  bargaining,  50 
commodity  standard,  the,  275-276 
compensated  dollar,  the,  276-277 
compensatory   principle,   the,    256- 

257,  259 
competition,  67-68,  582,  583,  588, 
612;     extent    of,    68-69;     unfair 
methods  of,  620-622 


competition  and  monopoly,  motive 

in,  582-583 
competitor,  the,  568-569 
complementary  agents,  352-353 
complementary  goods,  162-163 
concentration,  tendency  toward,  62- 

63 
Conquest,  English,  25 
consumption,    standards    of,     101; 

harmony   in,    101;     elasticity  of, 

594-59 S 
continental  currency,  227 
contracts,  71-72 
Cooley,  Judge,  605 
copyright,  528,  586 
corporate  abuses,  protection  against, 

552 
corporations,  532,  536,  537,  538,  539, 
540,  541,  542,  543,  544,  545,  546, 
547,  548,  55°;  advantages  of,  533- 

535 

cost,  defined,  177;  and  sacrifice,  178; 
and  limitation  of  factors,  178-179; 
and  the  price  of  product,  179-180; 
a  price  expression  of  limitation  of 
agents,  180;  increasing,  182-183; 
opportunity,  183-184;  past,  and 
present  supply,  185-187;  present, 
and  future  supply,  185-187;  sell- 
ing below,  187-188;  joint,  188- 
189 

"cost  of  high  living,  the,"  103- 
104 

credit,  203;  as  a  substitute  for 
money,  279-280;  use  of,  280-281; 
defined,  281-282;  the  basis  of, 
282-283;  facilitates  production, 
283;  danger  of,  284-286;  inelas- 
ticity of,  319-320 

credit  instruments,  203;  general  and 
limited  acceptability  of,  286-287 

creditors,  securing  funds  from,  542- 

543 
Crompton's  mule,  45 
cross  deliveries,  563 
cross-freights,  562,  563 


Index 


635 


cumulative  voting,  538-539 

currency,  203 

cutthroat  competition,  565,  566 

Darwin,  418,  422 

decentralization,  306 

decision   in   directing   expenditures, 

151-152 

demand:  questions  and  answers, 
166-170;  in  a  broad  market,  559- 
560;  quantity  of,  560-561 

demand  curve,  164-166 

democratic  government,  character- 
istics of,  19,  20 

deposits,  bank,  288-290;  time,  291; 
demand,  291 

De  Quincey,  15 

desirability,  in;  diminishing,  112; 
total,  113-115;  marginal,  115- 
121 

desires,  as  motives,  98-99,  100;  and 
productive  capacity,  102-103;  and 
ultimate  wealth,  104-106;  and 
association  of  ideas,  105-106; 
altruistic,  106-107;  and  wants, 
107-108;  repressibility  of,  108- 
109 

differentiation,  in  social  life,  66-67 

diminishing    costs,    institutions    of, 

596-597 

diminishing  money  returns,  385 

diminishing  returns,  the  law  of,  55, 
182,  183,  520 

directors,  537,  538,  548,  549!  re- 
sponsibility of,  553 

dividends,  542,  546,  548 

division  of  labor:  in  the  factory  sys- 
tem, 65-66 

dollar,  the  purchasing  power  of  a, 
86-87 

domestic  system,  the,  40-41 

domestication  and  indirect  produc- 
tion, 7,  8 

Doomsday  Survey,  17,  24 

dumping,  598 


early  American  economists,  80,  81 
early  specialization,  mistakes  in,  2, 

3 

East  India  Company,  39 

economic  classes,  70-71 

economic  laws,  54-56;  and  social 
institutions,  88-89 

economic  progress,  stages  of,  6,  7 

economic  rent,  396 

economics,  science  of,  1,  2;  subject- 
matter  of,  75-76;  laws  of,  87; 
scope  of,  88;  changes  in,  90;  and 
political  reform,  90-93;  and  busi- 
ness, 93-95 

economist,  the  requirements  of  the, 
2 

economy,  primitive,   15;    manorial, 

15 

education,  505;  dissemination  of,  78 

eminent  domain,  529 

enclosures,  33-35;   revival  of,  58-60 

England,  development  of,  23-24; 
area  of,  24;  population  of,  24 

English  commerce,  23 

entrepreneur,  the,  70,  71,  349,  356, 
360,  362,  369,  377,  381,  389,  411, 
439,  440,  443,  444,  458,  471,  473; 
defined,  342;  functions  of,  342- 
343;  as  middleman,  343-344;  as 
servant  of  demand,  344-345 

Eskimos,  the,  425 

Everett,  A.  H.,  80 

extensive  cultivation,  358 

extensive  margin,  478 

extensive  margin  of  utilization,  357- 
358,  359;   equality  of,  359~36o 

factors,  elastic  limit  of,  the,  366-368 

Fawcett,  H.,  454 

Federal  Reserve  Act  of   1913,  291, 

315,  322;   noteworthy  features  of, 

327-328 
Federal   Reserve   Board,   the,   322- 

323,  324,  326,  328 
Federal  Reserve  Notes,  324-325 


636 


Index 


Federal  Trade  Commission,  the,  611, 

623-626 
Federal  Trade  Commission  Act,  622 
Fetter,  Prof.  F.  A.,  326,  365,  400, 

472,  495 
feudalism,  15,  16 
fiat  money,  222-223;    a  monopoly, 

225-227 
fiat  theorists,  221,  224 
fighting  brands,  621 
Fisher,  Prof.  Irving,  232,  276,  491 
fixed  supplies,  1 76 
"Four  Great  Inventions,"  45 
France,  425 
franchise,  484,  529 
free  banking  system  of  New  York, 

the,  3 1 1-3 1 2 
freedom  of  trade,  the,  47 
free-silver  agitation,  271 
funds,  transmission  of,  327-328 

Gee,  Joshua,  409 

George,  Henry,  57,  408,  414 

Gibbon, 37 

Gide,  422 

"Gold  Bill,"  the,  267 

gold  bullion,  mint  price  and  market 

price  of,  215-216 
gold  standard,  the,  272-274 
good  money,  qualities  of,  204-205 
"good  trusts,"  618 
good-will,  483-484 
government  supervision,  306 
"greenbackers,"  221 
greenbacks,    221,    222;    and   prices, 

223-225 
Green's  Short  History  of  the  English 

People,  24-25 
Gresham,  Sir  Thomas,  253 
Gresham's  law,  253-254,   255,  257, 

259,  267 
gross  interest,  492-493 
growth  of  cities,  the,  62 
guilds,  26;   merchant,  27-28;   craft, 

29 
Guizot,  19 


Hadley,  President,  419,  624 

Halleck's  Psychology,  105 

Hamilton,  Alexander,  266 

Hargreave's  spinning-jenny,  45 

Harlan,  Justice,  620 

Hearn,  W.  E.,  101,  107 

Henry  VII,  36 

Henry  VIII,  36-37,  105 

high  pay  and  short  hours,  404-405 

high  rent,   and  short  factors,   381; 

defined,  382 
hindrances  to  trade,  28,  29 
hoarding,  its  effect  on  money  prices, 

238,  239 
holding  companies,  607,   608,   609; 

and  interlocking  directorates,  626 
Hume,  David,  409 
Hundred  Years'  War,  the,   29-30; 

effect  on  England  and  France,  30; 

changes  during,  30-35 

income,  real,  and  the  price  level, 
232-233 

incomes,  differences  in,  507;  dis- 
tribution of,  507-510 

incorporation,  articles  of,  535 

increase  of  numbers,  views  concern- 
ing, 409,  410,  411,  412,  413 

increasing  costs,  595-596 

increasing  gold  production,  effect  of, 

235-23° 
increasing  resistance,  386-387 
index    numbers,    simple,    242-243; 

weighted,  243-244;   Falkner,  244; 

purposes  of,  244-247 
Indiana  coal,  564 
industrial  classes,  beginning  of,  42- 

43 

industrial  process,  the,  character- 
istics of,  334,  335,  336 

industrial  revolution,  the,  41,  45,  63, 

7°,  330,  439,  444,  55° 
industry,   automatic   regulation   of, 
72-73;   co-operant  forces  of,  333- 
334;     automatic   adjustment   in, 
334 


Index 


637 


industries,  interdependence  of  in 
civilized  state,  22-23 

information,  communication  of,  120- 
130 

insolvency,  real,  299,  300;  legal,  299 

intelligence,  99,  100,  101 

intensive  margin,  478 

intensive  margin  of  utilization,  356, 
357;   equality  of,  359-360 

interest,  472,  473,  482,  489,  498,  501, 
504,  515,  517,  518,  521,  522,  523, 
524,  525;  rate  of,  490,  491,  496, 
498,  499,  500;  net,  492-493;  ad- 
justment of  to  capitalization,  496- 
497;    determining  a  rate  of,  511- 

513 
interlocking  directorates,  626 
Interstate  Commerce  Act,  604,  605, 

615,  620 
Interstate   Commerce   Commission, 

605,  606,  619, 624 
inversion,  fallacy  of,  499 
issuing  bonds,  544-545 
issuing  notes,  543_544 
issuing  stocks  and  bonds,  545-547 

Jefferson,  Thomas,  267,  268 

Jenks,  Prof.  J.  W.,  604,  605,  625, 

628 
Jevons,  W.  S.,  265 
Johnson,  J.  F.,  263,  459,  469 
joint-stock  association,  532 
Jones,  E.  D.,  285 

Kay's  drop-box,  42 
Kidd,  N.  G.,  119 
Kimball,  Professor,  39 
knighthood,  31 
knowledge,  4,  5 

labor,  436,  463,  464,  405,  473;  geo- 
graphic division  of,  64-65;  de- 
fined, 429-430;  direct  and  in- 
direct, 430-431;  demand  for,  431- 
432;   variety  of  demand  for,  432- 

433 


labor  standard,  the,  275 
labor-unions,  formation  of,  49-51 
laborer's  view-point,  the,  442-444 
laissez-faire,   47,   48;     and   control, 

614-615 
land,  474,  475,  476,  477,  478,  479, 

480,481;  as  capital,  481,  484 
large    production,    and    monopoly, 

386;  advantages  of,  556,  557, 561- 

564 
Lauderdale,  Lord,  80 
legel  tender,  Act  of  1857,  the,  268 
legislation,  need  of,  620 
liabilities  and  assets,  291-292 
limited  agent,  353,  354 
limited  liability,  533 
limiting  factor,  the,  362 
limping  standard,  the,  269-270 
Liverpool,   wheat   market   of,    127, 

128;  demand  at,  128-129 
Lollards,  30 

lords  of  manors,  alliance  against,  26 
Louis  XIV,  38 
love  of  posterity,  506 
"lump  of  labor"  fallacy,  the,  437- 

438 

machinery,  438,  439;  effect  upon 
labor,  439,  440,  441,  442,  443,  444, 
445,  446,  447;  and  market  de- 
mands, 444-445 

Macrosty,  H.  W.,  558 

"make-work"  fallacy,  the,  433_434» 

436 
Maltho-Ricardian  School,  the,  367 

Malthus,  T.  R.,  409,  412,  413,  416, 

418,  419,  420,  421,  422 
Malthusian    theory,    414-415,    416, 

418,  419,  420,  421,  422 
man,  in  his  primitive  state,  3,  4; 

power  of  supremacy,  4;  knowledge 

of  natural  forces,  4,  5;   as  user  of 

tools,  22 
management,  concentration  of,  534- 

535 
"Manchester  Doctrine,"  the,  48 


638 


Index 


manifold  note  issue,  306 

manorial  system,  the,  in  England, 
17-19,  20 

marginal  desirability,  468-470;  and 
value,  227-229 

marginal  land,  477-479 

market,  591,  592;  meaning  of,  123- 
124;  examples  of,  124-126;  ex- 
tended by  transportation,  126; 
broad,  129;  extent  of,  368-369; 
adjustments  in,  518-519;  limita- 
tion of,  589-59° 

market  demand,  158;  elasticity  of, 
161-162 

market  price,  131 

market  ratios  and  price,  130-131 

market  supply,  158;  movements  in, 
189-190 

Marshall,  Alfred,  405,  406 

McAdoo,  Secretary,  605 

McCulloch,  Secretary,  311 

member  banks,  324,  326,  328;  re- 
serves in, 326-327 

men,  selection  of,  557-558 

mercantilism,  38 

mercantilists,  47 

mergers,  609 

middlemen,  343,  344 

Mill,  J.  S.,  454 

modern  English,  rise  of,  31 

monetary  system  of  the  United 
States,  214 

money,  491;  and  price,  195-196;  in 
exchange,  196;  defined,  199-200; 
definition  of,  explained,  200-201; 
functions  of,  201-203;  stability 
of,  204;  uniform  purchasing 
power  of,  204;  elasticity  of,  205; 
convenient  to  handle,  205;  dura- 
bility of,  205;  exchange  of,  207- 
208;  convertibility  of,  216-218; 
marginal  use  of,  229;  exchange 
function  of,  229-231;  purchasing 
power  of,  231-232;  quantity 
theory  of,  236-237;  direct  and 
indirect  uses  of,  346-349 


money  expression  of  wealth,  86-87 
money  fallacy,  the,  490-491 
money  loans,  498 
money  market,  the  supply  side  of, 

519 

money  movements,  251-252 

money  wages,  453 

monometallism,  256 

monopoly,  37,  556,  574,  575,  576, 
578,  579,  582,  586,  590,  597,  598, 
602,  612,  613,  614;  some  advan- 
tages of,  565;  purpose  of,  570; 
evil  effects  of,  576-577;  test  of, 
583-584;  buying,  583;  selling, 
584;  temporary,  584-585;  capi- 
talistic, 585;  legal,  586-587; 
natural,  587;  quasi-natural,  587- 
589 

monopoly  price,  593-595,  5975  limi- 
tations on,  599 

monopoly  rents,  382-383 

monopoly  rights,  28,  484 

Morosini,  Miss  Giulia,  436 

multiple  or  tabular  standard,  the, 
274-275 

Napoleonic  Wars,  58 

National  Bank  Act,   the,  312-314; 

primary  object  of,  313;  provisions 

of,  3M-316 
national  banking  system,  defects  of, 

316 
National  Cash  Register  Co.,  621 
national  forces,  in  war,  331-333 
National     Monetary     Commission, 

316,  321 
national  strength,  in  an  autocracy, 

83 
national  system,  the,  36 
national  wealth,  83,  86 
natural  forces,  control  of,  43-44 
necessities,  108 
Newton,  55 

New  York  system,  the,  312 
Normans,  the,  17,  18,  24,  25 
Northern  Securities  decision,  626 


Index 


(539 


opportunity   cost,    183-184;     kinds 

of,  184-185 
"outside  paper,"  299 

panic,  of  1837,  311;  of  1839,  311;  of 

1907,  316 
Parliament,  30 
partnership,  53°-53i'>   general,  531; 

limited,    531;     disadvantages   of, 

S3I-S32 
past  cost  and  present  supply,  185- 

187 
patents,  528,  586 
patronage,  voluntary  and  enforced, 

589 
Peasants'  Revolt,  the,  32-33;  results 

of,  33 

Phillips,  Willard,  80 

physical  intensive  utilization,  355 

physical  science,  laws  of,  5 

Physiocrats,  the,  46-47 

piece  wage,  the,  450-452 

Pitt,  William,  410 

pools,  603-604,  605,  607 

population,  408 

pound  sterling,  weight  of,  208 

present  cost  and  future  supply,  185- 

'    187 

pressure  and  progress,  8 

price,  the  problem  of,  131-132;  defi- 
nition of,  144-146  (see  money  and 
price) 

price  level,  the,  132-133,  242 

price-making,  133;  conditions  of, 
133-142;  illustrations  of,  156-158 

price  movements,  240-241 

prices,  domestic  and  export,  597-599 

principle  of  resistance,  the,  353-354 

private  ownership,  528;  limits  to, 
529-530 

product  returns  vs.  money  returns, 

383-384 
production,  and  civilization,  n,  12; 
defined,  338;    texts  of,  338-340; 
social,  340,  341,  346;  competitive, 


340,  34i,  345,  346;  material,  346; 
and  discount,  519-521 

productive  agents,  355 

productive  capacity,  no,  $t,$;  and 
current  supplies,  76-77,  78;  in- 
crease of,  by  dissemination  of 
education,  78;  and  power  of  or- 
ganization, 79 

productive  establishments,  two  types 
of,  566 

progress,  three  stages  of,  6,  7 

property,  its  relation  to  government, 
19;  private,  56-57,  423,  424,  527; 
defined,  84,  85;  real,  528;  per- 
sonal, 528 

proportionality,  369,  371,  372,  407, 
426;  the  law  of,  361-363,  567; 
bearing  of  on  distribution  of 
wealth,  363-365;  affected  by 
price  of  agents,  365-366;  and  rent, 
388-389 

prospective  prices  and  present  de- 
mand, 163-164 

purchasing  power  and  supply,  175- 
176 

purchasing  power  of  money,  two 
meanings  of,  233-235 

quantitative  precision,  336-337 
quantity  and  money  returns,  369- 

37o 
quantity    theory    of     money    (see 

money  and  price) 
Queen  Elizabeth,  37,  86,  105,  253 
questionable  practices,  547-549 

railroads,  during  the  World  War,  605- 
606;  measures  advocated  for,  606 

Raymond,  Daniel,  80 

rediscounting,  318 

regional  banks,  324,  325,  326,  327, 
328 

relative    wages,    how    determined, 

458-459 
religion  during  Hundred  Years'  War, 

3° 


640 


Index 


rent,  374.  375,  376,  377,  378,  379. 
380,  381,  382,  383,  384,  387,  388, 
394,  395,  396,  499,  520;  defined, 
375;  time  element  in,  380;  lim- 
ited by  income,  389-390;  limited 
by  cost  of  reproduction,  390;  dif- 
ferential, 391,  392,  474;  and 
wages,  457,  458;  in  the  labor-cost 
theory,  473 

rent  problem,  the,  493 

reserve  banks,  the,  323-324;  re- 
serves of,  325-326 

reserves,  296-298 

restraint  of  trade,  615;  common  law 
on,  613-614 

Ricardo,  David,  80,  210,  474 

rich,  meaning  of,  81,  82 

right  of  way,  529 

Roman  Catholic  Church,  30 

Roman  fraternities,  27 

Roscher,  William,  281 

Ross,  Prof.  E.  A.,  424 

Royal  Society,  42 

salesmanship,  572-573 

saving,  521,  522 

scarcity,  the  notion  of,  no-iii 

science,  its  relation  to  art,  54 

sciences,    the,    development   of,    5; 

moral  or  mental,  5;    physical  or 

objective,  5 
scientific  farming,  43 
seigniorage,  208-209,  210,  211,  212, 

225;  and  the  purchasing  power  of 

money,  209-210;  in  the  monetary 

system  of  the  United  System,  213 
self-control,  506-507 
self-interest,  19,  69-70 
self-sufficiency,  9 
Senior,  N.  W.,  177 
settled  life,  influence  on  civilization, 

11 
Sherman  Act,  the,  268-269 
Sherman    antitrust    law,    the,    605, 

615,  616,  618,  620,  623,  625,  626, 

627 


short  factor,  the,  362,  363 

Sicily,  400,  415 

single  tax,  374,  375 

slavery.  13,  14,  15,  18 

Smith,  Adam,  48,  446 

social  changes,  in  England,  45-46 

social  expediency,  57-58 

social  legislation,  beginning  of,  48 

social  wealth,  79,  80,  81,  82 

special  charter  institutions,  312 

specie  payments,  223 

Spencer,  Herbert,  587 

standard  of  life,  the,  109-110 

Standard  Oil  Case,  the,  616-617,  62c 

Standard   Oil   Company,   the,   562, 

608 
Standard  Oil  Trust,  the,  607 
standardization,  337,  558,  559 
"Statute  of  Laborers,"  32 
stock,  533,  534 
stock-certificates,  534;  negotiability 

of,  540-541 
stockholders,  533,  534,  535,  537,  538, 

54i,  542,  540,  547,  548,  549,  S5o; 
inside  information  of,  539-540 
substitution,  360-361;    principle  of, 

599 

supplies,  172-175;  variety  of,  172- 
173;  adjustments  of,  173-174; 
limitations  of,  174-175;  competi- 
tion of,  181-182 

supply,  156 

supply  and  demand,  caution  in  the 
use  of,  154-155 

supply  curve,  movements  in,  190 

supply  of  labor,  426;  location  of, 
399-400;  industrial,  401-402;  non- 
competing  groups,  402;  peculiari- 
ties of,  404-405,  406,  407 

surplus,  295,  296;  and  the  limit  to 
exchanges,  1 50-1 51 

talent,  distribution  of,  558 
tariff,  the,  374 
Taussig,  F.  W.,  604 
tenants,  18 


Index 


641 


theory,  definition  of,  56 

thought  and  execution,  459-460 

thrift,  10,  n,  505,  506 

time-discount,  493-494,  495-496, 
498,  499.  502,  503,  504,  507,  5°8, 
509,  510,  511,  513,  514,  515,  516, 
517,  521,  522,  523,  524,  525 

tools,  cost  of,  568 

trade-mark,  528 

trade  regulation,  28,  29 

trades-unions,  48 

trading,  67 

transportation,  60-61 

tribal  property,  8,  9 

trust,  defined,  602-603;  legal  form 
of,  607 

trust  legislation,  purpose  of,  609- 
610 

trust  regulation,  618-619 

trusts,  prevention  of,  616,  617-618 

Turgot,  A.  R.  F.,  355,  356 

undivided  profits,  295,  296 

United  States,  the  industrial  devel- 
opment of,  61-62 

United  States  Steel  Corporation, 
608,  609 

units,  equal  desirabilities  of,    112- 

113;  "5 
usance,  520 
usance-value,  396 
utility,  111-112 

valuation,  152-154 

value,  definition  of,  146-147;  an 
individualistic  matter,  147-148; 
the  paradox  of,  148-149;  labor- 
cost  theory  of,  470-471,  479 


valueless  land,  477 

Van  Hise,  President,  564,  573,  609 

variety  and  trade,  9 

Vicar  of  Wakefield,  The,  409,  512 

wage-fund  doctrine,  the,  453-455 

wage  problem,  the,  455 

wage  system,  the,  461,  462,  463 

wages,  461,  462,  463,  464,  465,  473; 
defined,  449;  and  profits,  452- 
453;  real,  453;  effect  of  machin- 
ery upon,  455-456;  and  rent,  457, 
458 

Walker,  F.  A.,  130,  145,  200,  311 

war,  lessons  of,  78 

Warburg,  Paul  M.,  318 

Wat  Tyler,  33 

Watt,  James,  43 

Wealth,  development  of,  25;  de- 
fined, 80;  derivation  of,  81; 
meaning  of,  81,  82;  private,  82; 
public,  82;  per  capita,  83;  and 
property,  84,  85;  and  capital, 
85-86   ' 

Wealth  of  Nations,  48 

Webb-Pomerene  Act,  the,  626,  627, 
629 

Whiskey  Trust,  the,  564 

White,  Chief- Justice,  620 

White,  Horace,  265 

Whitebread,  Samuel,  410 

William  the  Conqueror,  17 

women  and  children,  employment  of, 

45 
Wyclif,  John,  30 

Young,  Prof.  A.  A.,  613 
Young,  Arthur,  59 


Date  Due 

NOV  28  *B 

n  ka* 

3  0  1982 

&JZJP  1 

S  Mffi? 

NOV     8  1 

983 

<f) 

UC  SOUTHERN  REGIONAL  LIBRARY  ft 


AA    000  609  254 


HB171.5 


T8 


HB171.5 


T8 


AUTHOR 


Turner,   J.R. 


TITLE 


Introduction  to  economics. 


DATE    DUE 


BORROWER'S    NAME 


Turner,  J.R. 

Introduction  to  economics. 


iiimiu^^H 


